The old Wall Street axiom that “The market will follow the transportation stocks” has very often been proved to be true, and the reason is simple. Whether by truck, train or plane, when the transports are moving products, packages and people, that typically means that the economy is on reasonably firm footing, which the current U.S. economy is. With the lowest unemployment rates in 50 years and wages going higher, opportunity is at the highest levels in years.

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In new research report, the analysts at Deutsche Bank note that during the free-fall the market took in the fourth quarter, despite reasonably solid forward guidance and prior reasonable quarter earnings, many of the top transports were comparatively hit harder than other sectors. The report said this:

In December, we assessed that valuations for U.S. Transportation companies overshot to the down side in the context of prospective growth, with forward multiples contracting at double the rate of the broader market. This is despite positive inflection in the outlook for free cash conversion for many companies, which should result to higher valuation. These dynamics have created dislocations and attractive risk/rewards for select U.S. Transportation stocks, which we highlight below; and now better supported by recent data points following several releases last week.

Four top stocks are rated Buy, and all make sense for growth portfolios with a degree of risk appetite and long-term investing outlooks.

FedEx

This remains the premier delivery provider, and its stock was absolutely crushed in December, down almost 30%. FedEx Corp. (NYSE: FDX) provides a portfolio of transportation, e-commerce and business services under the FedEx brand.

The company operates in four segments: FedEx Express (57% of revenues), FedEx Ground (30% of revenues), FedEx Freight (11% of revenues) and FedEx Services (3% of revenues). FedEx offers a variety of transport services to more than 220 countries, and it is a complete global service provider of transport and supply-chain solutions.

FedEx announced last week that it began offering voluntary cash buyouts to certain U.S.-based employees in a bid to reduce costs. It expects to incur charges of between $450 million and $575 million related to the program. Deutsche Bank said this:

FedEx shares trade at exactly 10 times fiscal 2020 EPS (ending May 2020), representing near-historic lows relative to the broader market. Also noteworthy, this valuation is in the context of significant downward revisions to estimates in recent weeks, with Street estimates erasing over $1 billion in fiscal 2020 profits related to the company’s prior profit improvement plan.

FedEx shareholders are paid a 1.5% dividend. The Deutsche Bank price objective for the shares is $212, and that compares with the higher Wall Street consensus target price of $224.48. The shares ended trading on Tuesday at $175.90.

Knight-Swift Transportation

This is the largest U.S. trucking company, and the stock is a solid Buy for investors looking to add the sector to portfolios. Knight-Swift Transportation Holdings Inc. (NYSE: KNX) is a truckload carrier with approximately 23,000 tractors and sizable brokerage and Intermodal operations. The company provides dry-van, refrigerated, intermodal (port) drayage and brokerage (truck and rail) services.

The former Knight Transportation operated one of the most efficient truckload businesses, driven by its extreme focus on cost per mile, which led it to a mid-80s operating ratio, nearly 10 percentage points better than its peer average, a level it hopes to replicate with the merger with Swift.

The company preannounced fourth-quarter results last week that were way above Wall Street estimates. Knight-Swift continues to make significant strides on improving Swift’s operational results, which could be 3% higher than prior targets.

Investors receive just a 0.75% dividend. Deutsche Bank has a $44 price target, while the consensus target is $41.58. The shares closed Tuesday at $30.97, down over 5% on the day.

Union Pacific

This top railroad has rallied back smartly from the fourth-quarter pounding and looks to be close to breaking out. Union Pacific Corp. (NYSE: UNP) is the largest railroad in North America, covering approximately 33,000 route miles in 23 states across two-thirds of the United States (27,500 owned miles and 6,000 leased or trackage right miles) linking Pacific Coast and Gulf Coast ports with the Midwest, eastern United States gateways and various north/south corridors to Mexican gateways. The company has over 8,400 locomotives and over 100,000 freight cars operating on its network.

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Deutsche Bank turned positive on the stock in the late fall, and said this:

We upgraded the shares to Buy on November 27 as we saw opportunity for $35 billion appreciation in equity value (+33%)- underpinned by $3 billion+ profit improvement potential and a Board that was highly engaged in achieving that potential- either through current mgmt. or new leadership. Despite the recently rally, we’re less than one-third of the way through fair equity value, in our view, implying still early innings for upside based on underlying profit potential. The appointment of new COO Jim Vena is a step in the right direction, and sets the shares up nicely in 2019.

Shareholders receive a 2.07% dividend. The $175 Deutsche Bank price target is higher than the $166.62 consensus figure, as well as the most recent close at $155.02.

Werner Enterprises

This is another top trucking company that offers solid upside for investors. Werner Enterprises Inc. (NASDAQ: WERN) is a truckload motor carrier of general commodities in both interstate and intrastate commerce. Werner is among the five largest truckload carriers in the United States with service terminals throughout the country. The company operates throughout the 48 contiguous states and also portions of Canada, and it provides through trailer service in and out of Mexico.

The Werner Logistics portfolio includes truck brokerage, freight management, intermodal, international and final mile services. International services are provided through Werner’s domestic and global subsidiary companies and include ocean, air and ground transportation; freight forwarding; and customs brokerage.

The analysts like the valuation levels now for the company and said this:

The company still trades at a 20% discount to estimated fair valuation. Werner appears most interesting to us at this point, given: 1. shares have significantly lagged Knight year to date 2. more resiliency of earnings given the company’s higher mix of Dedicated business; 3. record free cash flow in 2019 from lower capital expenditures, and; 4. the company will host its first-ever earnings call on February 6, which we believe should allow greater comfort on 2019 earnings expectations.

Shareholders are paid a 1.13% dividend. Deutsche Bank has set its target price at $40. The consensus target is $37.17, and shares closed at $32.79.

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While the top transports may not be in the most exciting sector, they offer solid upside potential to the Deutsche Bank targets, which all appear to be reasonably conservative. In addition, the pounding they all took last year offers investors very solid valuations for what could be a very good 2019.

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