The transportation sector did not display a good performance in the third quarter, unlike most other sectors. Several factors, such as low demand, political disturbance, weather patterns and price and production of commodities, affected the results of the sector. For the fourth quarter, we do not expect a major turnaround for transportation stocks. However, some of these companies are likely to come up with better results than the third quarter, mainly due to the holiday season and the outcome of the U.S. Presidential elections.
The U.S. Class 1 railways have been seeing sluggish growth over the last few quarters. The main reason for this was the weak demand and production of coal. The commodity has been an important energy source for years and forms a sizeable chunk of freight revenues. Hence, coal has been a key determinant of earnings for railways. However, the shift in focus to renewable sources of energy and the threat of climate change have resulted in lower demand for coal. Moreover, weak industrial demand too impacted coal volumes. However, the U.S. President-elect Donald Trump is pro-fossil fuel and thus, the coal industry is likely to see better days, going ahead. Trump is a strong proponent of clean coal and is likely introduce measures to revive coal demand. This in turn should give the much needed boost to the revenues of railways.
Airlines too are expected to perform significantly better in the fourth quarter. The Transportation-Airline industry carries a rank of #33 out of 265. The improvement in performance is expected to be supported by the holiday season and higher passenger volumes. The months of November and December are some of the busiest for airlines and most have seen a hike in traffic figures for the months on a year-over-year basis.
How to Make the Right Choice?
We have picked out four stocks that we believe are likely to outperform in the fourth quarter. We have selected the stocks on the basis of their Zacks Rank and Earnings ESP. We note that stocks with a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) along with a positive Earnings ESP have a higher chance of beating earnings estimates. In addition, these stocks also have a strong VGM Score. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores.
Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score carries a different weight while arriving at a VGM score. Our research shows that stocks with a VGM Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Canadian National Railway Inc. (CNI) is a leading Canadian rail company based out of Montreal. It operates the only coast-to-coast railroad network in North America. The company carries a Zacks Rank #3 and ESP of +4.55%. Please check our Earnings ESP Filter that enables you to find stocks that are expected to come out with earnings surprises. The company will be reporting fourth-quarter results on Jan 24, after the market closes.
We note that the company’s stock has outperformed the broader Zacks categorized Transportation-Rail industry in the past one month. The company gained 5.41%, while the industry gained 2.78% over the same period.
CSX Corp. (CSX) is based out of Jacksonville, FL and is a leading U.S. railroad. The company has a Zacks Rank #3 and an ESP of +4.08%. CSX is scheduled to release fourth-quarter results on Jan 17, after the market closes.
Notably, the company has outperformed the industry in the past three months. CSX Corp. gained 5.21% while the Transportation-Rail industry gained 2.78% over the same period.
Alaska Air Group, Inc. (ALK), based in Seatac, WA is a popular U.S. company carrier. The company recently completed the acquisition of Virgin America. Alaska Air has a Zacks Rank #3) and an ESP of +5.38%. Notably, the company also has a VGM Score of A. Moreover, Alaska Air’s PE of 13.72 is much lower than the industry PE of 19.80, which makes it a valuable pick.
The company is likely to report fourth-quarter earnings on Jan 19. The company has comfortably outperformed the industry in the past one month, having gained 7.96% compared with the industry’s gain of 4.20%.
Hawaiian Holdings Inc. (HA), which owns Hawaiian Airlines, is headquartered in Honolulu County, HI. The company is scheduled to report fourth-quarter results on Jan 24, after the market closes. Hawaiian Airlines is well known for operating the most number of flights between Hawaii and other U.S cities.
The company has a Zacks Rank #1 and an ESP of 3.10%. You can see the complete list of today’s Zacks #1 Rank stocks here. Hawaiian Holdings also carries a VGM score of A. Moreover, the company’s PE of 12.16 is much lower than the industry’s PE. The stock has outperformed the broader Transportation-Airline industry in the past six months. Hawaiian Holdings gained 25.45%, while the industry gained 23.47% over the same period.
Where Do Zacks' Investment Ideas Come From?
You are welcome to download the full, up-to-the-minute list of 220 Zacks Rank #1 "Strong Buy" stocks free of charge. There is no better place to start your own stock search. Plus you can access the full list of must-avoid Zacks Rank #5 "Strong Sells" and other private research See the stocks free >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Hawaiian Holdings, Inc. (HA): Free Stock Analysis Report
Alaska Air Group, Inc. (ALK): Free Stock Analysis Report
CSX Corporation (CSX): Free Stock Analysis Report
Canadian National Railway Company (CNI): Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research