For adherents of the old-school Dow Theory, the underperformance of transportation stocks in recent months has been worrisome, to say the least.
The failure of the Dow Jones Transportation Average (DJTA) to confirm the new highs in the Dow Jones Industrial Average (DJIA) and other major indexes has kept many of them sidelined during what has been, for the most part, a fruitful opportunity for buying stocks across many sectors.
However, with a growing number of transport stocks lately showing signs of strength, a belated Dow Theory “confirmation” is likely on the horizon. And if the DJTA does break out to a new high, it could unleash a new wave of buying interest as cash comes off the sidelines.
One of the Dow Theory’s basic tenets is that both the Dow Industrials and the Dow Transports must confirm each other in order for a bull market to be considered healthy.
The thinking goes that both the DJIA and the DJTA should make highs at roughly the same time in order to justify the broad market’s strength; if one of the two indexes doesn’t confirm a new high in the other, it’s regarded as a potential sign of internal weakness that could lead to a bearish market environment.
When both the Dow Transports and the Industrials are in harmony, however, it’s typically a sign that the market is firing on all cylinders with few internal crosscurrents. And this is the type of environment that is best suited for buying stocks since it implies volatility isn’t a major factor. (As an aside, strength in transportation stocks also typically suggests that fuel costs are diminishing—always a plus for consumers—while the supply chain is functioning well.)
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For the better part of this year, the Transports have failed to match the torrid pace set by the Industrials. As shown in the following chart, the DJIA has, in recent months, managed a string of successive new highs while the DJTA has remained stuck in neutral. But with the Transports now within kissing distance of a 14-month high—and with several leading stocks across the transportation industry group showing abnormal strength—the likelihood of a breakout has increased.
In light of this sector-wide improvement, let’s take a closer look at some of the transportation stocks that look promising, yet haven’t exhausted their rally potential.
3 Transportation Stocks with Rally Potential
Despite exiting the S&P 500 Index in September, American Airlines (AAL) continues to strengthen after turning a corner this summer. Broadly speaking, airlines are showing improved revenue trends after a horrendous showing during the Covid years, with both domestic and international flight trends drastically improving this year.
According to the International Air Transport Association (IATA), net profits for the global airline industry are expected to improve in 2024 by 11% from a year ago, with net margins also expected to increase. Total travelers, meanwhile, are expected to reach a record high of five billion in 2024.
Domestically, airlines are coming off one of the strongest summers ever, as travel demand broke several records in the U.S. during the latest travel season. Among the records set was the highest-ever six-month total for ticket sales, record full-year revenue and record anticipated passenger revenue. In addition, the full-time U.S. airline workforce is the highest it has been in over two decades.
As for American Airlines, it’s worth noting that stocks that are removed from major indexes (AAL was dropped from the S&P 500 in September) often rally in the months following the change. What’s more, the company has the added potential impetus of a strong earnings backdrop: analysts see the bottom line growing by around 40% in each of the next two years starting with 2025, with profits accelerating even more in the years to follow, driven by improvements in air travel costs and efficiencies along with the continued growth of expeditious online booking platforms.
Also in the airline space, economy airline JetBlue (JBLU) hasn’t kept pace with some of its industry peers since bottoming out last year. Unfavorable revenue trends, worker shortages and other problems arising in the wake of the 2020 shutdown all combined to put the transportation stock in a tailspin for several years. But the company has made some meaningful changes in its turnaround attempt over the last year, including better on-time performance and short-term bookings, lower fuel prices and the overall falling rate environment—all of which bode well for the airliner’s continued recovery going forward.
Falling rates in particular should help JetBlue’s attempt at transitioning to offering its customers more premiums and a better experience, moves recently implemented by other low-cost carriers. Going forward, management also plans to decrease capital spending, defer aircraft deliveries and improve the balance sheet in its ongoing attempt to strengthen its image and its overall position in the competitive air travel space.
And finally, while it’s not exactly a transportation company in the traditional sense, Georgia-based AGCO (AGCO) does have a transportation management system that helps manage supply chains by sea, land or air. The company’s main claim to fame is as the world’s largest manufacturer of machinery and equipment focused solely on the ag industry. Its tractors and combine harvesters are used by farmers globally (including the Challenger, Fendt and Massey Ferguson brands), But after the last major farm machine upgrade cycle in 2022 and 2023, tractor sales have softened in the past year.
However, management believes lower farm input costs—including fertilizer and fuel—lower interest rates and growing demand for ag production in several emerging countries it serves will be the catalyst that ignites a renewed upcycle for tractor and farm transport equipment sales in 2025. Moreover, AGCO is facing a request from its biggest shareholder for a drastic change to its board of directors, which could serve as a further catalyst for a turnaround.
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