I mostly write about trades that I am implementing myself in these pages, or at least ones that I'm considering but might not have room on my book for without moving other items around. On the Transports front, I haven't been crazy about the airlines and have geared my allocation toward the rails this year. However, I always maintain a long position in the SPDR S&P Transportation ETF (XTN) as one of my core positions as a mild hedge,just in case my other choices in this space backfire.
Fortunately, as commodity prices, rise -- and more specifically , as oil prices rise -- what is seen as higher overhead for an airline is also seen as more highly valued cargo, and in a growing economy, there's greater demand for such cargo. This is a tailwind for the rails, for the truckers and for maritime shippers. Check out this chart of the Dow transports in aggregate vs. the S&P 500, using the S&P 500 as a base adjusted to zero:
As you can see, the transports (the green line above) are underperforming the S&P 500 by 2% year to date even though the Dow Jones Transportation Index is up 5% for 2018. But separate the Dow Jones U.S. Railroad Index (the red line) from the Dow Jones U.S. Airline Index (the blue line) and a stark difference in performance between the two becomes apparent to even the untrained eye. The railroads are crushing it, while the airlines lag.
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If I were to add another railroad to these, I'd look most closely at Kansas City Southern (KSU) , Canadian National (CNI) and Canadian Pacific (CP) due to the obvious benefit likely to be experienced by these three firms in the wake of the recent NAFTA revamp (known as the USMCA). KSU is currently priced at a cheaper valuation, but the Canadian rails operate at higher margins.
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