Transports Retain Capacity for Gains

Nothing succeeds like success. Investors would do well to keep that sage advice in mind in the new year.

Why? A sizable body of research shows that momentum doesn't disappear when the calendar turns.

Since 1991, the strategy of sticking with the previous year's 10 best-performing industries for another year has produced a compounded annual return of 18.4%, according to Sam Stovall, chief investment strategist for Standard & Poor's. That clobbers the annual return of 9.7% on the S&P 500.

The logic behind this outperformance is pretty straightforward. If the reasons for an industry's success are good enough to push it to the top in the first place, it's likely that those fundamentals have relatively long lives.

Then there's human nature. Rising prices draw more buyers to a stock. That's how momentum works.

Of course, the music does stop at some point, often very abruptly, resulting in what can be a very damaging race to sell. That's why I like industries where strong or improving fundamentals support the price momentum.

Where Demand Still Chases Supply

My favorite sector for a buy-the-winners strategy in 2005 has to be transportation. The fundamental mismatch between supply and demand that drove revenue and earnings at most of the companies in this sector is still intact for 2005 and beyond.

Looking at the names of the 20 stocks that make up the Dow Jones Transportation Average, you'll be amazed that this index went up at all.

A good 25% of the list belongs to airlines, and we all know what a great year that industry had in 2004. Four of the five airlines on the list turned in substantial losses.

The Dow Transports 2004 was a good year for most of them, and 2005 should be too
Company	Industry	2004 Gain	Company	Industry	2004 Gain
Alexander & Baldwin (ALEX:Nasdaq)	Marine trans.	25.70%	GATX (GMT:NYSE)	Business support services	5.70%
AMR (AMR:NYSE)	Airlines	(15.40%)	J.B. Hunt (JBHT:Nasdaq)	Trucking	66.10%
Burlington Northern Santa Fe (BNI:NYSE)	Railroads	46.20%	Norfolk Southern (NSC:NYSE)	Railroads	53.00%
C.H. Robinson (CHRW:Nasdaq)	Trucking	46.50%	Northwest Airlines (NWAC:Nasdaq)	Airlines	(13.50%)
CNF (CNF:NYSE)	Trucking	47.80%	Ryder (R:NYSE)	Trans. services	39.90%
Continental Airlines (CAL:NYSE)	Airlines	(16.80%)	Southwest Airlines (LUV:NYSE)	Airlines	0.90%
CSX (CSX:NYSE)	Railroads	11.50%	Union Pacific (UNP:NYSE)	Railroads	(3.20%)
Delta Air Lines (DAL:NYSE)	Airlines	(36.70%)	United Parcel Service (UPS:NYSE)	Delivery services	14.60%
Expeditors Int'l (EXPD:Nasdaq)	Delivery services	48.40%	USF (USFC:Nasdaq)	Trucking	11.00%
FedEx (FDX:NYSE)	Delivery services	45.90%	Yellow Roadway (YELL:Nasdaq)	Trucking	54.00%
Source: MSN Money