Have you ever flipped through the newspaper and noticed that a well-known individual had passed away, only to say to yourself, "Gosh, I didn't know he was still alive."? Well, that's how I felt when I noticed that the Standard & Poor's 1500 Trucking index's relative strength ranking only recently declined after having remained among the top 30% through the end of last year.
And when I looked at the relative strength chart that accompanies this article, I was surprised to see that it held up as well as it did for as long as it did, considering that the U.S. slipped into recession 14 months ago. Year-to-date through Feb. 13, the S&P 1500 Trucking index fell 15.5% vs. an 8.4% slide for the S&P 1500. Over the past 52 weeks, while the S&P 1500 declined 38.5%, the Trucking group fell 38.6%.
So what's next for this group? As a reminder, the jagged blue line represents the subindustry index's rolling 52-week price performance as compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market outperformance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the index's long-term mean relative strength.
A Year-Long Decline in Freight
There are 10 large-, mid- and small-cap stocks in the S&P 1500 Trucking subindustry index. Twelve trucking firms are followed analytically by S&P Equity Research, three of which have favorable investment recommendations: Arkansas Best (ABFS), is ranked 4 STARS (buy), and Landstar System (LSTR) and Old Dominion Freight System (ODFL) both carry rankings of 5 STARS (strong buy). Heartland Express (HTLD), ranked 2 STARS (sell), is the only stock with an unfavorable investment ranking.
Kevin Kirkeby, CFA, the equity analyst who follows this group for S&P, has a neutral fundamental outlook for the S&P Trucking index. Freight volumes have declined for 12 straight months. S&P believes this can be attributed to several factors, including decreases in home construction, automotive production, and weak retail sales. While carriers face greater competition from the railroads, Kirkeby believes the larger, well-capitalized truckers are taking market share from the small players. The group, which has historically underperformed during periods of slowing economic growth, is frequently one of the first to turn as the market anticipates an economic recovery, although readers should remember that past performance is not a valid indicator of future results.
The general trend among truckload (TL; shipments exceeding 10,000 pounds) carriers in the fourth quarter was a modest reduction in prices, as the number of available loads decreased significantly. Spot market prices were pulled down during the quarter as carriers found themselves with too many trucks and trailers, even after the large cuts made earlier in the year.
Consolidation Amid Smaller Carriers
On the less-than-truckload (LTL; shipments weighing less than 10,000 pounds) side, carriers reported similar pricing weakness, aggravated by one large carrier facing financial difficulties that was reportedly discounting heavily to bring volume into its network. Several of the LTLs had warned investors that daily volumes were trending increasingly negative during the fourth quarter. The Cass Information Systems' Freight Indexes showed a 16.1% decrease in expenditures and a 23.1% decline in shipments in December 2008 vs. December 2007.
Kirkeby expects trucking companies to make more fill-in acquisitions as extended freight market weakness, combined with pending insurance and license payments coming due, leads to financial difficulties among weaker carriers. However, he thinks the TL trucking industry will stay highly fragmented, which S&P believes will cause it to remain quite competitive in the longer term, with new capacity eventually pulling profitability down to historical industry levels.
In the LTL segment, S&P expects growth to slowly recover in late 2009, with these companies focusing on price and cost optimization. Valuations have fallen to near the bottom of their historical ranges, in general.
So, there you have it. The group's relative strength has declined into the middle of the pack, and S&P has a neutral fundamental outlook. Therefore, it appears as if this group will only be a market performer in the months ahead.
Industry Momentum List Update
Here is this week's list of the sub-industries in the S&P 1500 with Relative Strength Rankings of 5 (price changes in the past 12 months that were in the top 10% of the S&P 1500), along with an index component with the highest S&P STARS (tie goes to the issue with the largest market value).
Subindustry Company Ticker S&P STARS Rank Price (2/13/09)
Automotive Retail O'Reilly Automotive ORLY 4 $29
Biotechnology Genzyme GENZ 5 $73
Brewers Molson Coors TAP 4 $39
Education Services Apollo Group APOL 4 $81
Environmental & Facilities Services Waste Management WMI 4 $29
Gold Newmont Mining NEM 3 $42
Health Care Services Express Scripts ESRX 5 $58
HyperMarkets & Super Centers Wal-Mart WMT 5 $47
Insurance Brokers Aon AOC 4 $40
Packaged Foods & Meats Kraft Foods KFT 5 $25
Pharmaceuticals Abbott Laboratories ABT 5 $55
Restaurants McDonald's MCD 5 $57
Trading Companies & Distributors Fastenal FAST 5 $34
Water Utilities Aqua America WTR 3 $21
Source: Standard & Poor's Equity Research