What are we looking for?
U.S.-listed transport stocks set to rally on a decline in oil prices.
Dow Theory is a point of popular market wisdom that states that the Dow Jones transportation average and Dow Jones industrial average should move in tandem in a healthy market. A divergence between the direction of these two averages can often be a bearish signal.
So far in 2015, the Dow industrials are up 1.9 per cent while the Dow transport average is down 7.6 per cent. While this can be interpreted as a negative signal, many market watchers attribute the recent rally in oil prices as a key contributor to the underperformance of transport stocks where energy is a large contributor to overall costs. Should energy prices decline from their current levels, the transport average stocks may revert to more closely track their industrial average counterparts.
The screen
We will be using Recognia Strategy Builder to search for U.S.-listed transport stocks that have declined significantly in the past 13 weeks but should be poised for future appreciation.
We begin by setting a minimum market cap threshold of $5-billion (U.S.) to focus on the larger and more stable companies in the market. Next, we will focus on companies whose stock prices have shown negative performance in the past 13 weeks.
We also wish to focus on companies with prospects to grow their earnings in the coming year. We will screen for companies whose earnings per share are projected to grow by 10 per cent or more based on analyst estimates from their results in the past year.
Finally, to ensure we don't overpay for our investments, we will screen for companies with price-to-sales ratios of 5.0 or less. This criterion divides the company's stock price by the company's revenue per share over the past 12 months and is often a useful valuation metric for comparing companies in the same industry.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas including daily updates on 72,000 investment instruments and 800,000 options contracts. Recognia analyzes data from 85 exchanges worldwide providing technical and fundamental research on stocks, ETFs, indexes, forex, options and commodities.
What did we find?
United Continental Holdings Inc. is the holding company formed when Continental and United Airlines merged in 2010. Headquartered in Chicago, the company occupies the top spot on our list. UAL stock has fallen more than 25 per cent in the past three months, primarily as a result of surging energy prices and concerns over pricing. The company currently has an extremely low price-to-sales ratio of 0.66, the lowest of any company on our list.
Unlike some other transport stocks on our list, United Parcel Service Inc. stock has held up fairly well over the past quarter, currently down only 1.8 per cent in the past 13 weeks. The stock has a reasonable price-to-sales ratio of 1.5 and good prospects for EPS growth based on analyst estimates. On April 28, the company announced first-quarter results that beat analyst expectations on earnings but narrowly missed on revenue.
CSX Corp. is the highest-ranked railway on our list. Like UPS, the stock price has held up reasonably well over the past quarter and is down just 2.2 per cent. The stock has the best price-to-sales ratio of any railway on our list. In late April, the company announced good first-quarter results and raised its dividend by 12.5 per cent.
Historical performance
Recognia Strategy Builder provides a back-testing capability to evaluate how well an investing strategy would have worked in the past. Using a five-year historical period with quarterly rebalancing, the screen described had a 13.9 per cent annualized return compared with 12.5 per cent for the Dow Jones industrial average.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments. Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.