Throughout the world, investors watch the Dow Jones Industrials (DJINDICES:^DJI) not just because of the 30 major companies that are components of the average but also as a sign of broader trends throughout the broader U.S. stock market. But as valuable as the Dow is as a barometer of overall market conditions, there are a couple of industries that it almost completely leaves out. As it happens, one of those sectors has been soaring, and investors who focus only on the Dow Industrials have missed out on a big bull run.
The sector in question is the transportation industry, and the Dow Jones Transports have left the Dow and the rest of the market in the dust lately, having soared 16% just since the end of November. Let's take a closer look at the Dow Transports and the trends that have led to such massive returns, with a view toward figuring out whether those gains are sustainable and justify investing in the stocks that make up the Transportation Average.
Get to know the Transports
The Dow Transports include 20 companies spanning the different sub-sectors of the industry. Among the components, you'll find railroad companies, airlines, trucking companies, marine transportation companies, and intermodal logistics and delivery companies.
Like the Dow Industrials, the Transportation Average is a price-weighted measure. That means that the companies with the highest-priced shares have the most influence on the average, and right now, Union Pacific (NYSE:UNP) and FedEx (NYSE:FDX) are the two stocks priced over $100 per share, giving them weightings of roughly 12% and 10% respectively. By contrast, low-priced JetBlue accounts for only about half a percent of the average's weight.
The big move in the Transports
So what's behind the Transports' surge? Since the end of November, airlines have been the biggest gainers in the average, with Delta soaring almost 45% and United Continental jumping 30%. As anticipation of an impending merger between American Airlines and US Airways turned into reality, airline investors celebrated the potential for tighter pricing power and less competition among the biggest U.S. carriers in the industry. Smaller airlines posted gains, but they weren't as big as those of Delta and United.
By contrast, trucking has proven to be a mixed bag for the average. CH Robinson Worldwide (NASDAQ:CHRW) has been the worst performer among the Transports, as its only losing stock with a 6% drop since the end of November. Despite having risen in anticipation of higher demand, CH Robinson plunged after missing earnings estimates earlier this month. As the company has tried to build up its market share, margins have taken a back seat, threatening profitability and making investors think twice about whether to pay fairly high earnings multiples for the stock at current levels.
All of the Transports share some common traits but have their own particular spins on many issues. For instance, fuel costs are a big driver for all transportation stocks, but railroads have a fuel-efficiency advantage over airlines and trucking companies that plays a vital role when energy prices spike higher. Similarly, certain types of goods lend themselves to transport by particular methods, and so strength or weakness in those areas of the economy leads to favorable or unfavorable conditions for the transportation stocks that depend on moving those goods.
Pay attention to the "other" Dow
After such a strong rally, it's no easier to predict whether the Transports' rally will continue than it is for the Industrials or any other stocks. With the catalyst that drove airline stocks higher having played itself out, the Transports will need to find another reason to move higher if they want to sustain and expand on their rally.
More generally, though, the key lesson to take away is that while the Dow Industrials have a good cross-section of companies that span across most major industries, leaving out transportation and utility stocks leaves some significant gaps. Keep your eyes on the other Dow averages to make sure you get the complete picture of what's happening in the stock market.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends FedEx. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.