• Recent results from the transportation and logistics stocks are giving JPMorgan Chase more confidence about the second half, as post-earningsperformance has marked a turnaround from the past few months.
• The stocks have trailed the market and the industrials sector since May, the firm says, based on worries about a peaking cycle and an uncertain connection to leveraging record freight rates.
• But groups like rail companies have "found their footing," the firm says, as "inflation-plus pricing becomes a more valuable attribute."
• J.P. Morgan had put a few stocks on review for upgrade in mid-May - and since then upgraded United Parcel Service Inc amid some greater parcel pricing power and a new $5 billion buyback.
• As for sentiment on the sector, the firm expects it will stay mixed as the market looks for that aforementioned leverage to near-record freight: "Some investors are still sidelined after recent 2H21 growth scares and prefer to steer clear of potential valuation de-ratings on peak of the cycle concerns," it says.
• UPS and FedEx earnings disappointed, which has cut sentiment on the parcel companies. Rails are still the favored inflation trade, while XPO Logistics - and its spin-off, GXO Logistics Inc - have "the highest amount of increment interest by a wide margin."
• As for rails, a volume step-down from the first quarter to the second was a key concern ahead of an expected second-half recovery, but J.P. Morgan isn't concerned as it says intermodal made up 55% of that quarterly decline, on rising port congestion - and other commodities declining month-over-month aren't really surprises.
• Overall the firm says it's been warming up to rails ever since putting them on its "buy the dip" list in mid-May. There, it's Overweight on Norfolk Southern(NSC)$ .
• Turning to mid-cycle stocks, there's the greatest potential downside for JB Hunt Transport and C.H. Robinson Worldwide(NASDAQ:CHRW), since they've usually de-rated when spot truckload momentum decreases, J.P. Morgan says. J.B. Hunt is well above historical premiums, while "the best time to own CHRW has likely passed."
• In larger sector themes, the firm says high frequency data isn't pointing to a consumer slowdown ahead; labor shortages aren't hitting every company the same (freight tech most disadvantaged, other than truckers); companies aren't likely to quickly lower cyclicality of earnings; the truckload rate cycle is showing clear signs of deceleration; and the new infrastructure bill is still not a "needle-mover" for freight (with activity spread out over several years, and involving lower-rated commodities like aggregates).
• Overall in the sector, its top picks are FedEx (FDX), Norfolk Southern (NSC) and TFI International Inc.
• And it would stay clear of truckloads (it's Underweight on Knight Transportation), Schneider National Inc. and Werner Enterprises).