3 Transportation Stocks to Buy Now - Analyst Blog

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The most impressive rally in transportation stocks since 2011 has been helping US equity markets rebound. From airlines to trucking, the entire range of stocks has been racing upward. The major factor powering this upsurge, which is four times as powerful as the broader market, is optimism generated by lower oil prices .

Airlines Biggest Gainer

The Dow Jones Transportation Average had fallen 11% between Sep 18 and Oct 13. The index has now jumped 9.7% over six days after concerns over Ebola have abated and investors began concentrating on profits. Railroad, trucking and airline stocks which make up the index are expected to provide average profit growth of 16% through 2016. The S&P 500 is expected to offer 9.6% growth during the same period.

Airline stocks have mopped up most of the gains from the transportation sector rally. Shares of JetBlue Airways Corp. ( JBLU ), United Continental Holdings, Inc. ( UAL ), Delta Air Lines, Inc. ( DAL ) and Southwest Airlines Co. ( LUV ) have gained 20% on the average. In fact, all stocks which make up the index have moved up over the period. The smallest increase has been posted by Norfolk Southern Corp. ( NSC ), which has gained 5.9%.

Will Crude Prices Hold?

Interestingly enough, these gains occurred even as crude prices remained above the $80 mark. The increase in crude prices was primarily due to a significant increase in China's oil demand. The country's implied oil demand increased 6.2% in September compared to August to touch 10.3 million barrels a day. This is the highest level recorded since February.

Additionally, China witnessed growth of 7.3% in the third quarter and an 8% increase in factory output in September. These figures also prompted the increase in oil prices. However, analysts believe this upsurge will not last for long.

Global Production Glut

Market watchers are of the view that the increase in Chinese demand could be a result of stockpiling. China's companies may be purchasing vast quantities of crude because of lower oil prices. The country's economic indicators may have come in better than expected but fears of a slowdown continue to linger. The IEA had responded to such worries by reducing its world oil demand growth forecast for 2015.

Additionally, certain members of the Organization of the Petroleum Exporting Countries (OPEC) have provided indications that the group may not act to reduce oversupply by curtailing output. Other members are factoring in lower oil prices into their budgets for next year.

Investors Confident About Economic Recovery

Overall, weak oil prices have negated fears of an Ebola outbreak. The first set of people who came in contact with the Liberian citizen infected with the Ebola virus in Texas were removed from a watch list early on Monday. This is a significant moment, providing relief to 43 individuals. At the same time, Nigeria has been declared free of Ebola, following a similar announcement from Senegal.

More importantly, the fact that transportation stocks have rebounded once Ebola fears abated are an indicator of the U.S. economic recovery. Even as the Eurozone and China are beset by economic worries, the U.S. is continuing to recover. Though GDP growth is expected to slow down from the 4.6% recorded in the second quarter, investors remain optimistic about the economy.

Our Choices

Below we present three stocks which will gain from these trends, each of which also has a good Zacks Rank.

United Continental Holdings, Inc. is the holding company for both United Airlines and Continental Airlines. United Continental Holdings was formed by the merger of Continental Airlines with UAL Corp. on Oct 1, 2010. The merger created the world's largest airline, overtaking Delta Airlines, which had acquired Northwest Airlines in 2008. United Continental maintains a significant presence in Houston, the company's largest hub and has opened a new terminal there.

United Continental holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 81.7%. The forward price-to-earnings ratio (P/E) for the current financial year (F1) is 9.80.

American Railcar Industries, Inc. ( ARII ) is a leading North American manufacturer of covered hopper and tank railcars. The company also repairs and refurbishes railcars, provides fleet management services and designs and manufactures railcar and industrial components used in the production of its railcars as well as railcars and non-railcar industrial products produced by others.

Apart from a Zacks Rank #2 (Buy), the company has expected earnings growth of 7%. It has a P/E (F1) of 14.66x.

Covenant Transportation Group, Inc. ( CVTI ) is a truckload carrier that provides just-in-time and other premium transportation service for customers throughout the U.S. Covenant Transportation offers freight brokerage services directly as well as through freight brokerage agents, along with less-than-truckload consolidation and accounts receivable factoring services.

Covenant Transportation holds a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 134.3%. It has a P/E (F1) of 23.05x.

The rebound in transportation stocks has significantly aided the recent rebound in stocks. Given factors likes lower oil prices and renewed belief in the economic recovery, this trend is expected to continue going forward. This is why these stocks would make good additions to your portfolio.

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SOUTHWEST AIR (LUV): Free Stock Analysis Report

NORFOLK SOUTHRN (NSC): Free Stock Analysis Report

JETBLUE AIRWAYS (JBLU): Free Stock Analysis Report

DELTA AIR LINES (DAL): Free Stock Analysis Report

UNITED CONT HLD (UAL): Free Stock Analysis Report

COVENANT TRANS (CVTI): Free Stock Analysis Report

AMER RAILCAR (ARII): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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