Transportation and shipping stocks can sometimes be viewed as boring compared to volatile high fliers in tech and healthcare. But of late, holders of XPO Logistics (NYSE:XPO) and FedEx (NYSE:FDX) have experienced no shortage of drama, with both stocks underperforming the market over the past 18 months.

Some of that weakness was due to company-specific issues, and some due to difficult macroeconomic issues and the emergence of new competition to deliver e-commerce packages. Both companies now face the challenge of restoring their once-pristine reputations on Wall Street, and proving the recent past was an anomaly and not the new normal.

XPO Chart

XPO and FDX vs. the S&P 500 data by YCharts

So which stock is more likely to return to its previous highs? 

XPO takes a U-turn

It has been a tumultuous 18 months for shares of XPO Logistics, a one-time high flier that lost nearly half of its value in the second half of 2018 before recovering much of what was lost in 2019. The drop followed criticism from a short-seller and the unexpected loss of a major customer, believed to be Amazon.com, and XPO spent most of 2019 trying to prove that the worst is behind it.

XPO was built around acquisitions, with CEO and roll-up specialist Bradley Jacobs using mergers and acquisitions to transform a small freight brokerage business into a shipping giant, in the process generating a 3,000% stock return over a 10-year period ending in 2018. But on Jan. 16, Jacobs surprised investors by reversing course, announcing a strategic review exploring the sale of one or more business units.

A truck driving on an open highway.

Image source: Getty Images.

In a statement announcing the move, Jacobs said he believes XPO suffers from a conglomerate discount.

"We continue to trade at well below the sum of our parts and at a significant discount to our pure-play peers," Jacobs said. "That's why we believe the best way to continue to maximize shareholder value is to explore our options, while remaining intensely committed to the satisfaction of our customers and employees."

XPO said it does not intend to part with its North American less-than-truckload unit, a major generator of EBITDA. Beyond that, we don't know much about the plans. The company will likely find interest in units including XPO's North American freight brokerage and contract logistics operations, as well as its European businesses, but there is no guarantee any deals will be signed.

Prior to the breakup talk, Jacobs had been emphasizing XPO's tech prowess, including tools to help retailers better compete against Amazon's vast delivery network and tech that helps match drivers and shippers to bring down costs and alleviate empty cargo holds. XPO has a lot of intriguing assets, and it is easy to envision a strong, streamlined XPO coming out of this process. It is just hard to know exactly what that XPO will look like at this moment.

Is FedEx on the mend?

While XPO had an up and down 2019, FedEx's year just kept going from bad to worse. The company underperformed the S&P 500 by more than 30 percentage points for the year, bogged down by trade wars, economic weakness, and its own issues with Amazon.

Last March, FedEx warned of "unprecedented" operational challenges, and reported a series of quarterly earnings misses and guidance cuts due to weaker-than-expected volumes. At the same time, it was increasing spending to integrate its $4.9 billion purchase of TNT Express, which was designed to grow its international exposure but ended up saddling FedEx with excess capacity in a slow-growth market. It is also spending to build out its distribution network to allow for year-round weekend deliveries.

Two FedEx trucks outside of a distribution center.

Image source: FedEx.

The company today trades at just 0.56 times sales, even below XPO's paltry 0.61x multiple, and 13.8 times expected earnings compared to XPO's 19.8x multiple. CEO Fred Smith has tried to argue the worst will soon be over for FedEx, as the company completes the TNT acquisition and the headwind of spending to add U.S. capacity turns into a tailwind of better utilization as FedEx delivers packages on weekends.

The market remains skeptical, in part because Amazon has targeted FedEx. The online retail giant in December temporarily restricted third-party sellers on its platform from delivering Prime-eligible packages through FedEx. With Amazon moving much of its logistics operations in house, FedEx's e-commerce strategy (similar to XPO's) has to be built around serving Amazon's rivals. That's a large and growing business, but there are also a lot of companies vying for that business.

Hopefully FedEx will get a boost from a thawing in trade tensions between the U.S. and China, but the coronavirus outbreak if nothing else figures to delay a pickup in shipping volumes, and could prolong FedEx's weakness. The company has a powerful network and a valid argument that the market is currently undervaluing the business. But investors could need to stay patient for another few quarters before benefiting from a potential recovery.

And the better buy is...

I own both XPO Logistics and FedEx, with no intention of selling either stock. A month ago, I would have recommended XPO as the better buy because I see XPO's potential for growth as having more upside than FedEx's turnaround story.

But XPO's recent announcements have created significant uncertainty about what the company will look like a year from now, and created new risks of management distraction and potential divestiture issues.

I trust Jacobs to deliver for XPO shareholders, and intend to hold my shares through the current strategic review. But until more is known about XPO's long-term plans, it is hard to recommend the stock for those seeking a long-term investment.

FedEx shares come with their own risks, but I believe the company is on the upswing and the shares will appreciate over time.

These are two interesting transportation stocks to keep on your radar for different reasons, and for those who can stomach volatility, XPO offers more risk but potentially higher rewards. But at this moment, for most investors, FedEx is the better buy.