BOSTON (TheStreet) -- Mutual funds that mainly buy transportation stocks have almost doubled the 2010 returns of the S&P 500 Index, the benchmark for most diversified U.S. funds.
Transportation-focused mutual funds have risen an average of 33% this year, reflecting expectations for faster economic growth in 2011. The performance may stretch well into next year if railroad-freight and airline-passenger traffic continues to increase and Internet-based sales growth remains on the same path, boosting package-delivery firms.
Dow Jones Transportation Average
, which tracks 20 industry stocks, is up 24% this year, led by
, the world's largest airline, with a gain of 81%. The S&P 500 has climbed almost 13% and the technology-heavy
has advanced 17%.
United Parcel Service
Union Pacific Railroad
, each the leader in their respective industry, are the consensus top picks of transportation-fund managers.
Indicative of the brightening outlook for the sector, October was the 10th straight month that air traffic has risen, according to the Air Transport Association of America. And it forecast a 3% rise in holiday-season travel.
, in reporting its fiscal second-quarter results Dec. 17, said it has seen strong gains in package shipping internationally and domestically, and raised its expectations for U.S. gross domestic product growth to 2.9% from 2.6% for 2011, and to 3.2% for 2012. FedEx and UPS are both viewed as economic bellwethers because their shipments cover a broad range of industries.
A growing number of retailers, including
, offered free shipping to online customers during the holiday season, which raised package volume for FedEx and UPS.
U.S. sales by Web retailers rose 15.4% to $36.4 billion from November through Dec. 23, according to MasterCard SpendingPulse, which tracks sales at 72,000 retailers. Internet sales also climbed 15% last year in the same period, but from a much smaller base.
UPS, also known as "big brown," is the No. 1 pick for the three diversified mutual funds that are transportation-focused, and it is a favorite of many of the top-performing, large-cap mutual funds as well. Its shares are up 27% this year and the company's outlook is bright, according to analysts.
Of the 28 analysts that follow UPS, 18 rate it "buy," four have it at "outperform," and six rate it "hold," according to Morningstar.
Standard & Poor's analysts are expecting UPS's 2010 revenue to rise 11% after a 12% decline in 2009, and they project 9% growth in 2011. Their estimate is for 2010 earnings per share of $3.54, up 53% from last year, and they forecast $4 for 2011.
UPS is a hefty 16% of the $500 million
Fidelity Select Transportation Fund
, which has a 41% return this year. FedEx, up 11% this year, gets a 3.7% allocation.
Railroad stocks are also on a fast track, with the nation's largest railroad,
, gaining 44% this year. It is Fidelity Select's second-biggest holding at just under 16%.
In October, Union Pacific reported that third-quarter profit jumped 51% as higher volume fed revenue growth. A Standard & Poor's analyst wrote, in raising the company's credit rating, that "we expect volumes to continue to improve and pricing to remain favorable over the next several months, resulting in further earnings growth and strengthened credit metrics."
fund also favors the package delivery two-some of UPS and FedEx, and railroad stocks.
Rydex, up 24% this year, has UPS as its largest holding at 11%, Union Pacific, at 8.5%, then FedEx, and two more railroads,
, up 32% this year, and
, up 20%.
Railroads are expected to see improving results as the economy recovers, since they are big haulers of coal and agricultural products to U.S. ports as well as recipients of containerized freight from Asia-Pacific for their return trips.
U.S. airlines are also recovering after their dismal performances of the past two years. Fitch Ratings said in a research note Dec. 9 that "most carriers will generate strong free cash flow and reduce debt in 2011." Its forecast is for mid-single-digit industry revenue growth for 2011.
The $166 million
Fidelity Select Air Transportation fund
, up 33% this year, leads with UPS, at 15% of the fund, then United Continental, at 9%, and
Delta Air Lines
, the world's second-largest airline, at 7%. In the period ending Oct. 31, the fund raised its Delta holding by 95,800 shares.
Delta's shares have risen 9.5% this year.
In addition to boosting its stakes in United Continental, Delta and
in the most recent reporting period, Fidelity Select Air Transportation also added to its holding of
, now at 7% of its assets. Its shares are up 28% this year.
Precision Castparts is a metal-fabrication company that makes castings for jet engines and gas turbines, and its parts are used in new and replacement aircraft.
A smaller company getting fund managers' attention is
, a shipping and supply-chain services company that is up 11% this year. Fidelity Transportation recently doubled its stake in the tiny firm to 242,800 shares in the reporting period ended Oct. 31. It has a market value of $262 million.
Rydex has been adding to its stake, now at 4.4%, of
Expeditors International of Washington
. The international freight-forwarding firm has seen its shares jump 58% this year.
For the third quarter, Expeditors reported that profit jumped 66% to $96.1 million from a year earlier, while revenue rose to $1.67 billion from $1.04 billion.
Analysts' recommendations on Expeditors' shares are mixed, with five rating it "buy," two "outperform," nine "hold," and one "sell," according to Morningstar.
UPS, Union Pacific, and United Continental have all earned three-star ratings from Morningstar analysts, whose highest ranking is five stars. That means their shares "should offer a 'fair return,' one that adequately compensates for the riskiness of the stock. Three-star stocks should offer investors a return that's roughly comparable to the stock's cost of equity," the firm says.
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