Sunday, January 18

Week 185 - Transportation-related Companies with Good Credit

Situation: Dow Theory predicts that a bull market will continue if the primary trend is upward, i.e., both the Dow Jones Industrial Average (DJIA) and the Dow Jones Transportation Average (DJTA) are making new highs. The idea is that the movement of goods to satisfy demand is every bit as important as producing the goods. As of this writing, the DJTA continues to “confirm” the bull market denoted by the DJIA’s current all-time highs. The problem is that very few companies in that important Transportation Average are investment-grade quality. Only 5 of the 20 companies have 1) a long-term S&P credit rating of BBB+ or better; 2) an S&P stock rating of B+/M or better; and 3) enough revenue to appear on the Barron’s 500 List of the largest public companies on the New York and Toronto Stock Exchanges.

Those 5 are: 
   CSX Railroad (CSX), 
   Norfolk Southern Railroad (NSC), 
   Union Pacific Railroad (UNP), 
   Expeditors International of Washington (EXPD), and 
   JB Hunt Transportation Services (JBHT), 

We’ve come up with 9 more companies that meet all 3 requirements and derive much (but not all) of their revenue from transportation-related activities. Three of the 9 happen to be among the 30 companies on the DJIA list: 
   United Technologies (UTX), 
   Caterpillar (CAT), and
   Boeing (BA). 

The remaining 6 are: 
   Canadian National Railway (CNI), 
   Sysco (SYY), 
   Canadian Pacific Railway (CP), 
   Cummins (CMI), and
   Honeywell (HON).   

How does our newfangled list of these 14 companies help? For starters, the quality is there. You can invest in any of the stocks issued by those companies at any time, as long as you only invest a small and fixed amount over regular intervals (dollar-cost averaging). Second, fundamental information is readily available because all 14 appear on the Barron’s 500 List published annually (in May). There you can find the most recent year’s sales, and the cash-flow related ROIC (Return on Invested Capital) vs. its 3-yr average. Then you can see how those data rank each company and how that ranking compares to the previous year. Third, we show whether the company was a small loser or a big loser during the Lehman Panic (see Column D in all the Table), and whether the company’s long-term total return (Column C in the Table) mitigated that risk (see Column E in the Table). If the Finance Value in Column E beats our benchmark’s (VBINX), you’re likely to benefit from owning the company’s stock instead of shares in VBINX.

Bottom Line: These stocks are the pulse of the economy, meaning they're high-risk high-reward. Only 5 of the 14 are Dividend Achievers, and only one of those (NSC) has a Finance Value that beat’s our key benchmark, the Vanguard Balanced Index Fund (see Table). But there is one other reasonable approach to investing in this sector, and that is to gradually build a position in iShares Transportation Average (IYT), which is an exchange-traded fund (ETF) that tracks the performance of stocks in the Dow Jones Transportation Average. When the earnings of transportation company stocks are growing at a nice clip, you can be confident that the economy is doing well. And vice versa. So own a few of these stocks and learn from their price movements. Then you won’t be mystified by the next lurch upward or downward in the stock market, and you won’t panic (sell) when others do. Except for the railroads (which are government-regulated to protect both customers and investors), the stocks in this week’s Table are not the “buy-and-hold” variety.

Risk Rating: 7

Full Disclosure: I own shares of CNI, UTX, and CMI.

NOTE: Metrics in the Table are current as of the Sunday of publication; metrics highlighted in red denote underperformance vs. our key benchmark (VBINX).

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