3 Stocks to Avoid This Week
These investments seem pretty vulnerable right now.
Moving people and things from place to place is big business, and many different transportation companies can take you and your stuff wherever you want. By investing in the stocks of those companies, you can profit from transportation.
More than a year after the onset of the COVID-19 pandemic, transports are still reeling from the disruption. Ports are jammed, shipping rates are high, and moving goods from point A to point B has never been more complicated. Below, we examine the top transportation stocks and explain how best to invest in them in the context of the pandemic.
Transportation stocks are those of companies categorized as industrial businesses, which include a wide array of heavy equipment makers and transportation services providers. The following types of businesses are included in the transportation industry:
Some companies that move things don't get treated as transportation stocks. For example, pipeline companies that move crude oil, natural gas, and water are classified as energy or utility stocks.
The coronavirus pandemic significantly impacted the global transportation industry, and its aftereffects are likely to linger for years. Airline revenues declined by 70% or more in 2020, and demand for air travel is not expected to return to pre-pandemic levels until the second half of the decade. During the pandemic, American Airlines (NASDAQ:AAL) was compelled to assume $22 billion in new debt in order to remain solvent.
Other transportation sectors have fared better. The pandemic-related growth in e-commerce has increased shipping volumes for both UPS (NYSE:UPS) and FedEx (NYSE:FDX). Post-pandemic, e-commerce is expected to remain popular, which means the revenues of these companies will probably continue to grow.
Domestic transportation has recovered faster than international travel and commerce. That dynamic should continue for the foreseeable future, favoring trucking companies, railroads, and tourism-focused discount airlines over large-boat shippers and airlines that heavily rely on international fares.
Among the best-known transportation stocks are the following:
To assess the merits of transportation companies, keep the following considerations in mind.
Transport companies tend to have high fixed costs, which are the costs that remain the same regardless of the quantity of goods or services sold. The best transportation companies keep their fixed costs under strict control.
A transportation company's operating ratio -- its operating costs as a percentage of revenue -- is also important. Operating costs differ from fixed costs because they vary in direct proportion to the quantity of goods or services sold.
Most transportation companies use a lot of energy, so their financial performances are directly linked to the price of crude oil. Whether the company needs jet fuel for planes, diesel fuel for trucks and trains, or a combination of electricity and natural gas to operate industrial equipment, the best transportation companies prioritize maximizing their fuel efficiency.
With high fixed costs, transportation companies need a lot of money up front to buy or create the equipment they need. Many choose to finance these capital expenditures using long-term debt, but the best transportation companies are careful to keep their debts at manageable levels.
You can evaluate a company both on a standalone basis and in comparison to its competitors. Competition in the transportation sector can be fierce, with many companies fighting to serve the same groups of customers. Using the U.S. airline industry as an example, carriers such as American Airlines, Southwest Airlines (NYSE:LUV), Delta Air Lines (NYSE:DAL) and JetBlue (NASDAQ:JBLU) are all competing to take you where you want to go.
When the economy is strong, transportation companies tend to perform well because plenty of people and businesses want to travel and ship things. But travel and shipping demand can fall dramatically during tough economic times, so transportation stocks are best suited to investors who are comfortable with cyclicality.
Transportation stocks provide direct portfolio exposure to the state of the economy and have a reputation for signaling whether good times or bad are ahead.
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