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Three Transportation Stocks

Companies in most industries do better as the economy improves. Consumers are freer with their spending, boosting earnings in consumer discretionary areas, and businesses order more inventory and spend more on services, benefitting everyone from manufacturers to tech companies. But one industry—transportation—is particularly well correlated to economic recoveries. Transportation companies benefit...

Companies in most industries do better as the economy improves. Consumers are freer with their spending, boosting earnings in consumer discretionary areas, and businesses order more inventory and spend more on services, benefitting everyone from manufacturers to tech companies. But one industry—transportation—is particularly well correlated to economic recoveries.

Transportation companies benefit from both business and consumer spending on everything from goods to raw materials to energy. In a way, transportation stocks are leveraged to economic activity—meaning that when the economy grows a certain amount, transportation stocks go up even more.

So, as the post-recession economic expansion really gathers steam, I’m seeing more and more transport picks in the pages of the newsletters I review for the Dick Davis Digests. Here are a few of my favorite recent recommendations.

First, from DRIP Investor, via the June 5 Investment Digest, comes a trucking and logistics company:

“One stock in the Transports that looks especially attractive is Ryder Systems (R). The company provides a variety of rental and logistics services in the transportation sector. Profits have surged in recent years, and record profits are expected in 2013. A decent yield of 2% and a rising dividend stream enhance appeal.

“The shares have performed well this year and are trading around their 52-week high. However, investors should not be scared off by the gains, as the stock still offers ample upside. ...

“Ryder is coming off a solid first-quarter performance. Per-share profits jumped 17%, with operating revenue up 3%. Per-share profits of $0.81 were $0.03 better than the consensus estimate and marked the fourth consecutive quarter in which the firm beat the consensus estimate. For the second quarter, the firm expects profits of $1.20 to $1.24 per share. The Wall Street estimate is $1.23. For 2013, the firm reaffirmed its earnings guidance of $4.70 to $4.85, up from $4.04 in the year earlier. Wall Street is looking for earnings of $4.85. ...

“The quarterly payout has increased more than 34% since 2009 and now stands at $0.31 per share. I expect a dividend hike in the 5%-10% range in the second half of this year. Ryder scores extremely well in our company’s Quadrix stock-rating system, with an Overall score of 91 and a Value score of 85 (all Quadrix scores are 0 to 100 with 100 being the highest score). The Value score is especially noteworthy in that it shows that, despite the price gains, there is still plenty of upside remaining in these shares.” - Charles B. Carlson, CFA, DRIP Investor, June 2013

My second idea comes from the rail sector, which is also benefitting from economic expansion, but is really getting a turbo boost by serving the energy industry. Shipping oil and gas by rail is more expensive than transporting it by pipeline, but railroads are able to serve areas—like many of the newly discovered shale formations—that aren’t yet connected to major pipelines.

This stock recommendation comes from Dow Theory Forecasts Editor Richard Moroney, via the latest Investment Digest:

Union Pacific Corp. (UNP) freight trains run along about 32,000 miles of track connecting ports in the Pacific Coast and Gulf Coast to the Midwest and eastern United States. The company, serving many of the fastest-growing population areas, is the only railroad that reaches all six major Mexico gateways.

“The stock has gained 25% this year and is not especially cheap at more than 18 times trailing earnings, a 6% premium to their 10-year average and in line with the industry median. But Union Pacific boasts strong growth prospects. Rising analyst estimates project 2013 earnings of $9.52 per share, up 15% on 6% revenue growth. If Union Pacific meets that profit target and its P/E ratio holds at current levels, the stock will climb 12% by early next year. Five of the six Quadrix® category scores exceed 75, supporting an Overall rank of 92. Union Pacific, yielding 1.7%, is a Long-Term Buy.” - Richard J. Moroney, CFA, Dow Theory Forecasts, 6/3/13

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And finally, I have one high-yield idea in this sector, from the container shipping industry. This recommendation comes from the latest Dividend Digest and was written by Forbes Dividend Investor Editor John Dobosz:

“After falling by 3.3% in 2012 according to the World Trade Organization, total global trade is expected to rise 3.3% in 2013. One way to play the resurgence is to buy shares of a major player in shipping containers. Purchase, N.Y.-based TAL International Group, Inc. (TAL) is one of the world’s biggest owners and lessors of intermodal containers and chassis. Sales for 2013 are expected to rise 9.2% to $643 million, with earnings jumping 13% to $4.44 per share. This is comfortably above the $2.56 in annual dividends, a payout that has been rising steadily since 2009 and currently good for a yield of nearly 5.9%. There appears to be a good deal of value in TAL shares. They have traded at an average of 13.4 times earnings over the past five years, but now sport a P/E of just 9.8. Getting back to its historic multiple would correspond to a stock price of $59.50 per share.” - John Dobosz, Forbes Dividend Investor, www.newsletters.forbes.com, 212-367-3388, 5/20/13

Wishing you success in your investing and beyond,

Chloe Lutts Jensen

Editor of Investment of the Week

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Chloe Lutts Jensen is the third generation of the Lutts family to join the family business. Prior to joining Cabot, Chloe worked as a financial reporter covering fixed income markets at Debtwire, a division of the Financial Times, and at Institutional Investor. At Cabot, she is a contributor to Cabot Wealth Daily.