How's GM Doing Now Its moved to China..

Hungerford: Transportation stocks can be good investments when economy strengthens

Larry Hungerford

Posted: Sunday, February 2, 2014 12:00 am

Larry Hungerford/Special Correspondent

Most economic forecasters believe our economy this year will grow at about 3 percent or slightly better, the best GDP gains since 2007. Europe has emerged from its recession and Japan’s economy, aided by huge government expenditures, is also expanding. Both are forecast to grow their GDP about half as much as ours, probably between 1 and 2 percent this year.

Economic expansion is especially good for transportation stocks. I’m recommending seven that we own. (The stocks below are relatively small positions in the Hungerford portfolio. Most of our savings are in mutual funds and our two largest stock positions — Apple and IBM — that have been lousy investments since 2012.)

My top transportation-stock pick is Ford (F). It hit a 12-month high of $18.02 Oct. 24 before dropping about 15 percent on false rumors that its star CEO, Alan Mulally, would return to Seattle to become Microsoft’s CEO. Ford’s stock also was hurt by its forecast for flat profit growth this year, given the expenses it will incur introducing 23 new models in 2014.

Ford’s premier new model introduction this fall is its new aluminum-body 2015 F-150 pick-up. (The F-150 has been the best-selling vehicle in the U.S. for 19 of the past 20 years; 763,402 were sold in 2013). The new F-150 will be 700 pounds lighter and is projected to get 20 percent better gas mileage.

Another reason to like Ford is that it boosted its dividend 25 percent last month and now yields 3.3 percent. It currently sells at 11x earnings, about 30 percent less than the market average.

The two other auto stocks I own are also paying 3.3 percent dividends, Damler AG, the parent company of Mercedes, and General Motors. Now led by its new esteemed CEO, Mary Barra, GM has a huge presence in China where last year it sold almost four times as many Buicks as it did in the U.S. (809,918 there compared to 205,509 here). GM has been profitable 15 quarters in a row, has $30 billion in cash, and its stock is up almost 40 percent since last February. Now selling at less than 10x earnings, it is even cheaper than Ford.

New 2014 Mercedes models have been getting rave reviews from several automobile magazines. It is now selling its new “low-cost” CLA 250 model for as low as $29,990. Even though its stock has jumped 68 percent since last April, the German automaker’s stock appears to be a bargain at a current P/E slightly under 10.

For far higher risk (and reward recently), consider the two airline stocks I own — Delta (DAL) and American Airlines (AAL). Delta has soared 127 percent since last February, yet its recent all-time record fourth-quarter profits have lowered its P/E to less than 3! The new AAL, a merger of American Airlines and U.S. Airways that has soared 40 percent since Dec. 9, is now the largest airline in the world. Both are benefitting from fewer and fuller flights and all those baggage fees and other extra charges that most of us despise.

Recently, at Woodard & Co., we bought two other transportation stocks for a few of our clients. We think railroads and railcars are excellent investments, given stronger economic growth. Backing up our belief is an excellent article, “America’s Second Rail Boom,” in the current issue of Forbes (2/10/14, pp 92-98).

Last month, I suggested that we buy Canadian National Railway (CNI) selling at a multiple of 19x earnings, about 15 percent higher than the market average. The only railroad to serve three coasts — all the way east-west from Nova Scotia to Vancouver and north-south to the Gulf of Mexico — CNI is also the only railway that has a hub in Canada’s oil-sands region. According to a Barron’s article (12/23/13, p. 33), CNI has the potential to grow its earnings 60 percent by 2018.

Todd Senter, my Woodard & Co. colleague, picked Trinity Industries (TRN) last fall, the only small-company of the seven transportation stocks recommended here. It’s gained more than 25 percent since October. TRN is also the largest holding of one of my favorite small-cap mutual-fund managers.

Texas-based TRN is the owner of railcars and barge companies and is ideally located to take advantage of ever-increasing oil and gas shipments. On Jan. 14, it announced its purchase of Westmor, a company that specializes in the manufacturing and repair of cryogenic containers that store and transport natural gas. And, at only 14x earnings, it’s priced about 10 percent below the overall market average.

Obviously, individual stocks, and certainly ones specializing in transportation, are much higher risk than mutual funds. If the economy begins to weaken, they will be mediocre investments. However, if the economy continues to grow stronger, they definitely have the potential to easily outperform market averages