Among the many features found in each week’s edition of Value Line’s Selection & Opinion service is a list of the seven best and worst performing industries over the past six weeks. These rankings can be found on the inside back cover of Selection & Opinion. The roughly 1,700 stocks in the Value Line universe are currently divided among about 100 industries. Notably, for the purposes of calculating these results, the performance of each stock is equally weighted to the others in its industry (i.e., irrespective of market capitalization).
The equity markets have backed off some from last month’s highs, but continue to hold onto strong gains year to date. The Value Line Arithmetic Average, for instance, has advanced 19.5% so far this year, including a 3.4% increase for the period covered in our latest Industry Price Performance rankings (April 30th to June 11th). In this environment, an industry needed to climb nearly 9% over the past six weeks to qualify for a spot in our top seven. The Trucking Industry was the top performer over this stretch, rising 12.0%. Securities Brokerage (+10.1%), Entertainment Technology (9.4%), Internet (+9.3%), Life Insurance (+9.1%), Auto Parts (+9.0%), and Power (+8.9%) stocks did well for investors, as well.
In looking for investment ideas among the best performing industries, we are starting at the top and the 10 stocks that make up our coverage of the Trucking Industry. Notably, this has been a difficult space for investors for most of the current bull market. Granted, shareholders of J.B. Hunt Transport (JBHT) and Old Dominion Freight (ODFL) have been rewarded with impressive share-price gains in recent years, as earnings at both of these well-run businesses have climbed steadily amid rising revenues and expanding margins. Still, the majority of the trucking equities have been stuck in low gear for most of this stretch.
The last six weeks, though, have been a different story. Shares of JBHT and ODFL were solid, rising 2% and 12%, respectively, but it was one of the industry’s long-time laggards, Arkansas Best (ABFS), that made the biggest contribution to the group’s presence among the best-performing industries. The company, which has about 10,000 employees, is a provider of freight transportation services. It offers a wide variety of logistics solutions, including less-than-truckload (LTL) and full-load shipments, expedited ground and time-definite delivery, freight forwarding, and freight brokerage.
Arkansas Best has been in prolonged funk, failing to turn a profit in three out of the past four years, and we suspect 2013 will be a challenge, as well. Helped along by last year’s purchase of Panther Expedited Services, the top line should climb at a high-single digit pace, to about $2.25 billion, but earnings are likely to struggle to get back into the black, likely finishing just $0.05 a share or so above breakeven. Notably, the company’s difficulties appear to be at least partly related to an inefficient cost structure. It has been saddled with one of the highest labor-cost ratios in the LTL industry. Optimism that changes for the better are on the horizon appears to be contributing to the market’s surge in enthusiasm for this equity.
In all, ABFS stock has roughly tripled in price since last fall, including an advance of roughly 85% in the latest six-week period. The recent gains have likely been driven in large part by the anticipated benefits of a new labor agreement. In early May, Arkansas Best’s largest subsidiary, ABF Freight Systems, reached a tentative deal with the Teamsters on a 5-year contract. (Subsequent news that the company had received and rejected overtures from industry rival YRC Worldwide about selling the ABF Freight business seemed to add to the enthusiasm here, as well.) Meanwhile, Arkansas Best is also moving to freeze its non-union pension plan and halt the accrual of future benefits. These actions should produce material savings down the road.
Overall, these recent moves appear to lend further credence to our long-term outlook for a healthy recovery in profits. Earnings should rise to $0.80 a share in 2013 and may well surpass $2.00 by 2016-2018, well below what the company earned prior to the last recession, but a welcome change from the losses that have prevailed in recent years. Overall, though, we think ABFS stock is currently best suited for momentum investors. With the recent advance in the share price, appreciation potential for the 3 to 5 years ahead is only about average. Too, the stock gets a low mark for Price Stability (25 on a scale from 5 to 100) and its dividend yield of 0.6% will do little to entice income-oriented accounts.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.