3 transportation stocks set to jump

As the saying goes, the trend is your friend -- and these companies' charts are signaling impending breakouts.

By StreetAuthority Jun 4, 2014 12:20PM

Image: Freight train inspection © image100, CorbisBy Crista Huff, StreetAuthority

I have three chart services at my fingertips -- but for me, reviewing charts is a visual thing. After 26 years of deciphering stock charts, recognizing the patterns has become second nature.


Every weekend, I screen all the growth stocks that I follow to see which charts are on the verge of breaking out. I then take the stocks with good-looking charts and review their fundamentals. I'm looking for stocks with projected earnings growth (plus dividends) of 15 percent or more for each of the next three years.


My goal is to identify the stocks that have the best chance of going up immediately. The charts tell me which stocks are going up, and the earnings growth verifies that the stocks have a good reason to go up. Now I've got my buy list for the week.


I then review the larger list of stocks that made the first cut-off -- the ones with the bullish charts -- and group them into industries to see which trends materialize. Whichever industry is leading, I do more research among the major stocks in that industry to find a few more good investment ideas.


Earlier this year, oilfield services companies -- Baker Hughes (BHI), Halliburton (HAL) and Schlumberger (SLB) -- rose to the top of that list. The stocks rose in unison, then formed tight trading ranges for five weeks. They now appear ready for additional capital gains, led by Schlumberger's breakout last week. As the saying goes, the trend is your friend.


More recently, the stocks that are consistently ending up in my buy list include anything transportation-related (with the exception of automakers): airplanes, freight (trucking), railroads, rental cars and trucks, and even motorcycles.


Three of these bullish growth stocks are just beginning to break out above their recent trading patterns. It's time to catch a ride with transportation stocks.


Kansas City Southern (KSU)

Kansas City Southern (which my colleague Marshall Hargrave profiled in February) owns railroad investments and 6,600 miles of track, ranging from the central U.S. through Mexico and into Panama.


Fresh off strong results in its most recent quarter, KSU's management foresees earnings growth eventually reaching 20 percent per year. Analysts agree and expect the company to sustain double-digit earnings growth of 15 percent to 17 percent a year for the next three years.


KSU's longer-term profit drivers include continued industry growth in Mexico, including two new car-assembly plants; expansion of Mexican rail traffic into the U.S.; and continued deleveraging. With a current long-term debt-to-capitalization ratio of 31.5 percent, KSU is aiming for lower debt levels than its peers.


Shares of KSU (which pays a 1 percent dividend yield) rose steadily for several years, peaked in November, then corrected with the broader stock market early this year. After stabilizing between March and May, the stock broke past upside resistance at $106 last week. I expect KSU to climb to $114, meet minor resistance, and then keep rising to the November highs around $126 -- a 17 percent gain over today's share price. At that point, I expect the stock to consolidate for a while before making its next move.

American Airlines Group (AAL)

American Airlines Group emerged from bankruptcy protection last year, merged with US Airways Group in December, and issued new stock.


Trends in business and leisure air travel have been improving with the growing U.S. economy, allowing for increased revenue and net income. In addition, cost efficiencies associated with the US Airways merger are also contributing to profitability.


The Street expects American's EPS to grow 77 percent this year, to $5.15 per share, followed by additional double-digit growth in 2015 and 2016. That's a huge leap in earnings.


What's more, the resulting forward price-to-earnings (P/E) ratio is shockingly low at 7.7. Compare that with Southwest Airlines (LUV) at 17.6 and Delta Air Lines (DAL) at 13.5.


If American's 2014 P/E rises to the low end of its peers' range at 13, that would give AAL a price of $67, representing 68 percent upside over today's price.


The company has higher cash levels than its peers. Analysts see a dividend increase and a large share repurchase authorization as being likely later this year. And while airlines typically have higher debt levels than other industries, clearly American Airlines is comfortable enough with its debt levels to deploy cash elsewhere.


AAL fluctuated steadily between $33 and $39 for the past four months, but that range has narrowed recently to $37.50 to $39.50. A narrowing of a trading range is a very bullish sign for a pending breakout -- and sure enough, AAL has begun closing at new highs in recent days.

Hertz Global Holdings (HTZ)

Hertz Global Holdings is the owner of airport car rental brands Hertz, Dollar, Thrifty and Firefly. (My colleague Marshall Hargrave also profiled Hertz in February.)


Hertz plans to spin off its construction equipment-leasing division in a tax-free distribution to shareholders around early 2015. Hertz expects to garner around $2.5 billion from the spin-off, which it will use to pay down debt and repurchase about $1 billion of stock.


Increases in business and leisure travel are contributing to Hertz' strong financial outlook. Profitability is also increasing from cost synergies associated with last year's acquisition of Dollar Thrifty Automotive Group.


As Morgan Stanley's analysts summarized, "Hertz is a great brand, rentals are a consolidated industry, and [Chairman and CEO] Mark Frissora is known for being a good steward of capital."


Consensus earnings estimates show very nice EPS growth of 14 percent this year and 26 percent next year for Hertz, which currently sports a forward P/E of 15.7.


Earlier this year, analysts feared that increases in used-car supplies and new-car price wars would be detrimental to Hertz's ability to resell its cars at good prices. Those fears have not played out, and as a result, stock charts of rental car companies are turning decidedly bullish.


After almost doubling in price in early 2013, HTZ has been trading roughly sideways (while edging upward) for a year. In May, the trading range narrowed to $27.70 to $29.70, a bullish indication that the stock price is about to launch toward new highs again.

Risks to consider: KSU's risks include currency fluctuations, and Mexico's legislature is considering measures to open up rail traffic to increased competition. Like other airlines, American's profitability is affected by fluctuations in fuel prices, labor costs, and economic growth. Wall Street makes frequent adjustments to Hertz's earnings estimates, causing volatility in the stock price. A slowing economy would adversely affect the profitability of all three.


Action to take: KSU has begun its upward move, but AAL's breakout has only tentatively begun. No one has missed their opportunity to catch the next upswing in American Airlines stock. I expect Hertz's next price run-up is imminent. My recommendation on all three is to buy now.


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3Comments
Jun 4, 2014 8:13PM
avatar
Any article that mentions Haliburton in it is anti-American. They're a terrorist group. 
Jun 4, 2014 8:13PM
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We recently heard from American Airlines. Things aren't going well outside the HQ bubble. 
Jun 4, 2014 8:12PM
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