Investing in Transportation Stocks

Updated: Dec. 31, 2020, 8:08 p.m.

Moving people and things from place to place is a big business, and many different transportation companies aim to get you and your stuff where you want it. By investing in the stocks of those companies, you can profit from transportation.

Right now, the transportation industry has been seriously disrupted by COVID-19. Below, we'll look more closely at transportation stocks and how best to invest in them in light of the pandemic.

What are transportation stocks?

Transportation stocks fall into the industrials sector, which includes a wide array of makers of heavy equipment as well as providers of key business services. You'll find the following businesses in the transportation industry:

  • Airlines, which fly passengers
  • Air freight companies, which fly cargo
  • Railroads, which move passengers and freight by train
  • Trucking companies, which move goods by road
  • Marine shipping companies, which move products by sea
  • Logistics companies, which come up with the best combination of modes of transportation to move things quickly and efficiently
  • Service providers that help other companies with all of these modes of transportation, such as airport operators, marine ports, and private toll-road companies

Some companies that move things don't get treated as transportation stocks. For instance, pipeline companies that move crude oil, natural gas, and water are considered energy or utility stocks.

Some top-notch transportation stocks

Among the best-known transportation stocks are the following:

  • United Parcel Service (NYSE:UPS). A giant in package delivery, UPS has seen a big upsurge in activity thanks to the rise of e-commerce. Not only does it ship billions of packages and documents every year by land, sea, and air, but UPS also maintains a network of stores, customer centers, and drop boxes for customer use.
  • Union Pacific (NYSE:UNP). This railroad has an extensive network of track in the western two-thirds of the U.S., with several different routes that go from the Mississippi River to the Pacific Ocean. Union Pacific ships everything from coal and chemicals to crops and cars.
  • J.B. Hunt Transport Services (NASDAQ:JBHT). With an extensive trucking network, J.B. Hunt serves the U.S., Canada, and Mexico. J.B. Hunt also uses partners to offer transportation other than trucking, ensuring its customers can get things where they want them in the most efficient way possible.
  • Kirby (NYSE:KEX) is the top tank-barge operator in the U.S., using the entire Mississippi River watershed as a conduit for moving goods through the heartland. Kirby also serves the West, East, and Gulf Coasts along with Alaska and Hawaii to deliver bulk liquids to customers.
Tractor trailers being loaded behind a factory.

Image source: Getty Images

How to evaluate top transportation stocks

You’ll see some commonalities if you invest in transportation stocks. To assess how these companies will fare, keep the following in mind.

Costs

Transport companies tend to have high fixed costs. The best ones keep those costs under control. Pay attention to the operating ratio, a measure of costs as a percentage of revenue, and look for companies with numbers lower than their rivals’. Most companies report some version of this ratio, or it can be calculated from earnings reports.

Note, too, that these companies use a lot of energy, so they are sensitive to crude oil prices. Whether they use jet fuel for planes, diesel for trucks and trains, or a combination of electricity and natural gas to run updated equipment, the best transportation companies seek to be as fuel efficient as they can be.

Debt

It's expensive for transportation companies to buy the equipment they need. Financing purchases through long-term debt can be smart, but the best companies keep their debt levels from getting unsustainably high.

Economic strength

When the economy is strong, transportation companies tend to do well, because plenty of people and businesses want to ship things. But shipping demand can fall dramatically during tough economic times. Investors have to get used to the ups and downs of the transportation industry in response to changing conditions in the global economy.

Competition

It's common for several companies to fight for the same group of customers. For instance, even just in the U.S., you'll find carriers like American Airlines Group (NASDAQ:AAL), Southwest Airlines (NYSE:LUV), Delta Air Lines (NYSE:DAL) and JetBlue (NASDAQ:JBLU) fighting against each other and their peers. As with other transportation stocks, comparing key metrics like capacity and profitability can be valuable in assessing whether one stock is better than another.

COVID-19

The coronavirus pandemic rippled through the global transportation industry, and its aftermath will linger in various sectors for years to come. Airlines saw revenue fall 70% or more in 2020, and they don’t expect demand to return to pre-pandemic levels until the second half of the decade. Even as demand slowly recovers, the U.S. industry will have to repair balance sheets and pay down some of the $50 billion in new debt taken on during the crisis.

Other sectors have fared better. UPS and FedEx (NYSE:FDX) saw volumes surge due to growth in e-commerce. Even if e-commerce growth slows after the pandemic, the volumes are unlikely to recede.

Expect domestic transportation to recover faster than international. That favors truckers and railroads over large-boat shippers, and should favor tourism-focused discount airlines over those who rely on international fares to pad margins.

Related topics

Are transportation stocks for you?

Transportation stocks can make a valuable contribution to your stock portfolio. With direct exposure to the state of the economy, transportation stocks have a reputation for signaling whether good times or bad lie ahead.

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