Jeff Saut: Why Trucks Lead the Way in High-Performing Transportation Sector

By Jeff Saut  APR 24, 2014 3:55 PM

A company like Cummins will likely benefit from an expected truckload pricing cycle.

 


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In yesterday's post on the Buzz & Banter [subscription required], I wrote about Dow Theory considering that the Dow Jones Transportation Average (INDEXDJX:DJT) had traded to a new all-time closing high. Dow Theory states that the market is in an upward trend if one of its averages (Industrials or Transportation) advances above a previous important high, and its accompanied or followed by a similar advance in the other average. In the post, I stated that I still believe Dow Theory works despite the changes in its composition over the years. I also emphasized that the two averages don't need to confirm each other simultaneously, concluding that "[i]n the days ahead, either an upside confirmation will occur [from the Dow Jones Industrial Average (INDEXDJX:DJI)], or there should be another attempt to sell stocks off." Piqued by my report, my firm's transportation analyst (Tyler Brown at Raymond James) emailed me with this:

[Your report is] interesting, but fundamentally the Trannies have been picking up a bid on the theory of improved truck price inflation. The idea is that we are potentially on the cusp of a truckload pricing cycle (something we haven't seen for the better part of a decade) given supply issues (i.e., can't find truck drivers these days), exacerbated by demographic issues. Such an event (i.e., pricing) should benefit all surface transportation. Art Hatfield and I have said to untold accounts, "So goes trucks, so goes everything." Remember that we Americans love our trucks, and trucking revenues make up the vast preponderance of US surface transportation spend, and thus tend to be the "tail that wags the dog." Take a look at the truckload carriers; they've been going bananas and are leading the way. I just thought I would give you a little color.

I mused that is interesting because it plays to another one of my themes, namely, energy conservation. For example, a few weeks ago I spent time with a family that owns a bunch of 18-wheelers. They told me that the old trucks get two to three miles to the gallon, but that the new trucks get seven to eight miles to the gallon. "That's huge," I remarked. And one of the potential beneficiaries of a refresh of the US trucking fleet is Cummins (NYSE:CMI), which is positively rated by our research correspondents.

Ultimately, I continue to think that earnings will surprise on the upside and that the equity markets will do the same. And then there was this from the insightful SentimenTrader, "The broad equity market is not experiencing bubble conditions. There are some isolated pockets that are candidates (biotechnology and some narrow groups of technology stocks), but overall, we do not have the overwhelming condition consistent with past excesses (see the chart)." Plainly, I agree and as stated, "I think an upside breakout is coming that will represent yet another Dow Theory 'Buy Signal.'" 

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No positions in stocks mentioned.

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