Value & Income

Ground transportation stocks poised for a smooth ride?

Consolidation and the potential for cyclical economic improvement has made certain less-than-truckload carriers attractive, according to Fidelity's David Wagner.

  • After dealing with weak demand coming out of the COVID-19 pandemic, the less-than-truckload transportation industry within the industrials sector could be riding an extended route of steady earnings growth due to improved pricing, profit-margin expansion and volume increases in the coming months, says Fidelity Portfolio Manager David Wagner.
  • "The valuations of LTL stocks were hit hard after widespread inventory destocking during the pandemic, but rebounded in the second half of 2023, and I believe there could be more room for growth," says Wagner, who manages Fidelity Advisor® Industrials Fund.
  • Wagner aims to invest when he believes a stock's price becomes disconnected from the company's intrinsic (fair) value, a dynamic that often occurs at cyclical extremes because of market overreaction. This can present opportunities for a disciplined investor whose time horizon spans a full business cycle, according to Wagner, who has helmed the sector-focused portfolio since July 2023.
  • Companies that offer LTL transportation provide services for smaller loads or quantities of freight that are, as the name implies, less than a full truckload, explains Wagner. These services can accommodate the shipping needs of businesses that frequently move smaller batches of goods, which often comes into play, for example, when a distant customer could potentially experience a decline in sales revenue due to lack of inventory.
  • The prospect of cyclical improvement in the domestic economy, along with consolidation and structural improvement in the LTL industry, paints a favorable outlook for these businesses, in Wagner's view.
  • "With inflation decelerating and the prospect of multiple Federal Reserve rate cuts to help stimulate U.S. economic growth in 2024, there are signs that destocking might be in its latter stages," says Wagner. "This is good news for LTL carriers because, as one of the industrials sector's short-cycle groups, they would likely be a key beneficiary of near-term economic improvement."
  • Wagner notes that the recent bankruptcy of carrier Yellow, which had been the third-largest U.S. LTL player in terms of volume shipped, may provide another tailwind for the industry.
  • He points out that Yellow didn't restructure following its bankruptcy filing; instead, it ceased operation altogether. As a result, the volume that used to be handled by Yellow has been divided among the remaining LTL players.
  • As of February 29, the fund held outsized positions in LTL carriers Saia and XPO. Both stocks performed well in 2023, and though their valuations have increased, Wagner believes they could benefit further from the absence of pricing pressure from Yellow, which tended to be the low-cost LTL carrier.
  • Additionally, both Saia and XPO are focused on improving the quality of their service, according to Wagner, which should also lead to better pricing.
  • "I think there are still several catalysts for these businesses in 2024 that could boost their revenue and earnings," he contends.
  • For specific fund information such as standard performance and holdings, please go to the "Funds Managed" link on this page.

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