What happened
Shares in package delivery giant UPS (UPS 10.46%) fell by more than 2% in early trading today. The move comes after an analyst from a heavyweight firm, Citi's Christian Wetherbee, recommended buying the transportation stock.
A buy recommendation is never bad, but the context is important here. Wetherbee is recommending a so-called "pair trade," whereby investors buy UPS and short FedEx. In other words, even if UPS stock falls, FedEx will likely fall even more, and investors will still make money from the trade.
Wetherbee's rationale is that the deteriorating macroeconomic environment will lead to weakening volumes at FedEx and UPS, and the latter is better positioned to deal with it.
NYSE: UPS
Key Data Points
So what
There's logic to the argument that UPS is better positioned than FedEx. After all, UPS is already being more selective about its deliveries. As a result, the company is generating more revenue and profits even as its volume is falling.
However, the point that concerns investors about the analyst's note is the commentary on a weakening economy. It's undeniable that a slowdown in the economy will hurt UPS. For example, the company has been focused on growing revenue with small and medium-sized businesses (SMBs), which are not immune from slowing consumer spending.
Now what
Consumer spending is slowing, but it's far from clear what the extent of it will be, and the market has already priced in some sort of economic correction. Meanwhile, UPS's underlying business is improving thanks to its focus on key end markets like SMBs and healthcare and its tactic of being more selective over e-commerce deliveries. As such, it's likely to emerge from any recession in more robust shape.
