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Published: September 20, 2010
Can you name the
oldest stock
index still in use? Here's a clue: it's even older than the
Dow Jones Industrial Average (DJIA).
Ten points if you guessed the Dow Jones Transportation Average
(also known as the Dow Transports). Charles Dow dreamed up the
index nearly 130 years ago, as he presumed that the share price
movements of transportation-related companies would provide a
clear read on the amount of goods being sold (and trafficked)
across the country.
(As a side note, Dow also noted the importance of the Dow
Transports and the DJIA moving in tandem. If only one was
rallying, you shouldn't trust it. This is one of the six tenets
of the Dow Theory, which is best left for another day).
Had Dow been around today, he might have stopped focusing on the
Dow Transports and simply watched FedEx (NYSE: FDX), the
world's largest shipper. As you look at FedEx's stock chart in
the last year, you can get a clear read on investor expectations
about the economy.
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Shares rallied nicely into the spring, just as investors came to
assume that the economic rebound would be sustainable. A sharp
slump in FedEx shares into early July mirrored the increasing
bearishness among investors for the economy and corporate
profits. The fact that shares have since surged +20% tells you
everything you need to know about the most recent investor
outlook for the
economy.
A healthy pause
After that recent run, shares are pulling back -3% on Thursday
as FedEx released generally solid quarterly results and boosted
its outlook above the consensus. Don't let the pullback scare
you -- it happens every quarter. Investors buy shares ahead of
earnings and always seem to take profits when results are
announced. That's because management is usually very cautious in
its financial assessments, which can temporarily spook
investors. And they did it again. "We are expecting a phase of
somewhat slower growth going forward," said the company's
Chairman Fred Smith on the quarterly conference call.
And that's just fine. Demand for shipping has already rebounded
sharply from the depths of the recession (FedEx's sales were up
+18% from last year), and the simple fact that the company sees
growth ahead is the main takeaway. Only recently, many investors
had been fretting that the economy may be heading back into
recession. At this point, even slow growth creates a more
welcome backdrop for investors, which explains why the stock
market -- and FedEx -- have been rallying in recent weeks.
Action to Take --> This is
not to say that shares of FedEx are a buy. Shares appear fairly
valued at around 16 times projected fiscal (May) 2011 profits.
It's hard to argue that shares deserve a higher multiple when
growth is likely to be just OK for at least the next year. And
that might also imply only moderate upside for the broader stock
market in the months ahead as well. That's why it's so important
to be a stock-picker in this market environment.
Investors looking at transport stocks should check out
Arkansas Best (Nasdaq: ABFS), which is poised to pick up
market share from distressed rival YRC Worldwide (Nasdaq:
YRCW). I looked at the shipper back in June in a profile of
companies benefiting from rivals' woes.
Results are likely to be lackluster for the rest of the this
year, but should be improving into 2011 thanks to recent
streamlining efforts, expected pension reform and slightly
higher shipping volume coupled with firmer pricing. Right now,
shares of Arkansas Best trade for about four times consensus
2011 EBITDA forecasts.
-- David Sterman
Staff Writer
StreetAuthority |
