With just a few minor bumps in the road, the so-called Trump rally continues moving down the road.
Speaking of roads, one of the hottest sectors has been the transportation sector. The Dow Jones Transportation Average is up about 12% just since Nov. 8 and up nearly 25% year-to-date.
The reason is straightforward – the economic policies of President-Elect Trump are expected to get America’s economy moving again. Economists and analysts up and down Wall Street are busy raising their GDP estimates for 2017, 2018, and beyond.
Add to that the fact that many of these transport companies and transportation stocks are U.S.-focused. That means these companies will benefit most from tax cuts and the rollback of regulation. They will also feel the sting less of any protectionist measures.
Transport Subsector: Railroads
My favorite subsector of the transportation universe is the rail sector. Rail stocks largely have not run as far and as fast as some other stocks in the transport index.
That is due no doubt to the recent years of steeply declining shipments for both coal and oil.
Yet, conditions are improving for the railroads. Rail traffic for November was the best month of the year when compared to year ago numbers.
One definite piece of good news for the industry and rail stocks is the record harvest from U.S. farmers. They are forecast to reap an additional two billion bushels of corn and soybeans than they did last year.
These grains need to be transported by railcar either from grain elevators to processing plants around the country or to the coasts for export. That translates to grain shipments being up around 6.5% so far this year.
Rail Stocks: GATX
When one speaks of railcars, GATX (NYSE: GATX) should immediately come to mind.
This company started in 1898 as a lessor of 28 railcars. Today it is one of the world’s largest railcar lessors with operations in both North America and Europe. In North America alone, GATX has a fleet of nearly 125,000 wholly-owned railcars and more than 600 locomotives.
It is perfectly poised to prosper in the economic environment under Trump.
First, if interest rates do continue to rise, the lease rate GATX charges on its rail fleet will also rise.
Economic growth will spur growth among its customers. For example, 27% of its fleet is leased by chemicals companies. In this environment, GATX is usually able to stretch the length of its leases too.
And getting back to grains, GATX reported that, in the third quarter, 100% of its grain cars were in use.
The stock is up about a third just since Trump’s election. But I expect gains to continue in 2017 as its business perks alongside the economy.
Rail Stocks: Wabtec
My second choice in the rail sector is Westinghouse Air Brake Technologies (NYSE: WAB), which is known as Wabtec.
After its acquisition of France’s Faiveley Transport, it is one of the largest rail equipment companies in the world with revenues of $4.2 billion. Among its biggest customers are General Electric (NYSE: GE), Caterpillar (NYSE: CAT), New York City Transit and, of course, all the major railroad companies.
Its history dates back to 1869 when George Westinghouse revolutionized the rail industry with the invention of air brakes.
And Wabtec is still innovating today, much like its founder did.
- It is one of two major suppliers of the newest technology in brakes – electronically controlled pneumatic (ECP) brake systems.
- The company is also the leader in positive train control (PTC) systems. Put simply, with PTC a train receives information about its location and where it is allowed to travel safely. Equipment on board the train will enforce this, preventing unsafe movements.
Despite Trump’s perceived loosening of regulations, it is unlikely he would want to roll back the requirements for increased safety of trains.
This factor and the expected pick-up in freight train traffic should finally boost WAB stock. With the weakness in freight (62% of its revenue), WAB stock has edged up only 2.5% since the election.
But its business, as with most transportation companies and rail stocks, should get a boost from a President Trump.