How to evaluate top transportation stocks
You’ll see some commonalities if you invest in transportation stocks. To assess how these companies will fare, keep the following in mind.
Transportation companies use a lot of energy to get things where they need to go. They’re therefore sensitive to crude oil prices and fuel costs. Whether they use jet fuel for planes, diesel for trucks and trains, or a combination of electricity and natural gas to run updated equipment, the best transportation companies seek to be as fuel-efficient as they can be.
It’s expensive for transportation companies to buy the equipment they need. Financing purchases through long-term debt can be smart, but the best companies keep their debt levels from getting unsustainably high.
When the economy is strong, transportation companies tend to do well, because plenty of people and businesses want to ship things. But shipping demand can fall dramatically during tough economic times. Investors have to get used to the ups and downs of the transportation industry in response to changing conditions in the global economy.
It’s common for several companies to fight for the same group of customers. For instance, even just in the U.S., you’ll find carriers like American Airlines Group (NASDAQ:AAL), Southwest Airlines (NYSE:LUV), Delta Air Lines (NYSE: DAL) and JetBlue (NASDAQ:JBLU) fighting against each other and their peers. As with other transportation stocks, comparing key metrics like capacity and profitability can be valuable in assessing whether one stock is better than another.
The coronavirus pandemic has disrupted the transportation industry both domestically and globally. Aviation, for example, has been hit hard as regulatory requirements — including government mandates to serve certain cities and fly specific routes — conflict with travel restrictions and lack of demand. All of the major U.S. airlines have suspended their dividends in response.
Meanwhile, stay-at-home orders and business closures have boosted demand for e-commerce shipping services but hurt business-to-business shipping. That’s been a mixed blessing for shippers like UPS as they continue to build out their e-commerce networks.
As the effects of COVID-19 ripple through the global economy, transportation investors should be prepared to roll with the punches.