Delta, FedEx, United: Five Transportation Stocks to Buy Now

Given that the U.S. economy is strong and transportation is very sensitive to economic activity, it’s not surprising that many hedge funds like transportation stocks right now. After a rough start to the year, transportation stocks have rebounded to post 4.07% gains over the past three months.

In this article, we’ll take a closer look at the smart money’s favorite stocks in the sector, including three airlines, Delta Air Lines, Inc. (NYSE:DAL), United Continental Holdings Inc (NYSE:UAL), and American Airlines Group Inc (NASDAQ:AAL), one railroad, Union Pacific Corporation (NYSE:UNP), and one wide-moat delivery company, FedEx Corporation (NYSE:FDX).

Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track over 750 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).

#5 FedEx Corporation (NYSE:FDX)

– Number of Hedge Fund Shareholders (as of June 30): 46
– Total Value of Hedge Funds’ Holdings (as of June 30): $3.35 billion
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 8.20%

Although some investors worry about future competition from Amazon.com, Inc. (NASDAQ:AMZN), the smart money does not appear to harbor the same fears. Of the 749 hedge funds that we track which filed 13F’s for the June quarter, 46 of them owned shares of FedEx Corporation (NYSE:FDX) at the end of that quarter, up by one fund quarter-over-quarter. Analysts note that Amazon only accounts for 3% of FedEx’s revenue, a number that isn’t very big in the long run. Given its focus on e-commerce, it is also unlikely that Amazon will be a direct competitor to FedEx over the long-term. Shares of FexEd meanwhile trade at just 12.2-times forward earnings estimates.

#4 Union Pacific Corporation (NYSE:UNP)

– Number of Hedge Fund Shareholders (as of June 30): 55
– Total Value of Hedge Funds’ Holdings (as of June 30): $2.55 billion
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 3.50%

Although railroad stocks retraced in 2015 and early 2016, the sector has made a comeback of sorts since February, as crude prices rebounded. Given that railroads make meaningful profits from transporting oil, many investors expect the higher WTI prices to lead to growing production (eventually) and more oil transportation business for railroads. Due to increased sector enthusiasm, Union Pacific Corporation (NYSE:UNP) shares have rallied by 23.3% year-to-date. Mason Hawkins‘ Southeastern Asset Management trimmed its holding in Union Pacific by 5% in the second quarter, to 6.37 million shares at the end of June.

We’ll fly through hedge funds’ three favorite transportation stocks on the second page of this article.

#3 American Airlines Group Inc (NASDAQ:AAL)

– Number of Hedge Fund Shareholders (as of June 30): 56
– Total Value of Hedge Funds’ Holdings (as of June 30): $1.35 billion
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 8.30%

American Airlines Group Inc (NASDAQ:AAL) is a value play. Shares currently trade at just 7.4-times forward earnings estimates, and the company is aggressively returning capital back to investors, with management having returned $1.7 billion in capital through share repurchases and dividends in the second quarter alone. American Airlines’ large capital investments last year and this year should help it in the long run too. Because it has one of the youngest fleets in the industry, American Airlines will have lower costs and more cash flow in the future for even more buybacks and dividends.

#2 United Continental Holdings Inc (NYSE:UAL)

– Number of Hedge Fund Shareholders (as of June 30): 57
– Total Value of Hedge Funds’ Holdings (as of June 30): $2.53 billion
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 18.30%

Analysts at Imperial Capital are bullish on United Continental Holdings Inc (NYSE:UAL) due to the company’s many strengths, including an expected $2.8 billion in free cash flow generation in 2016, and the company’s recent hire of Andrew Levy as its CFO. Imperial Capital analyst Michael Derchin believes United shares will outperform and could achieve a price of $57 over the next 12 months, which is $10 above their current price. Hedge funds, on the other hand, were a little more circumspect in the second quarter. 57 funds that we track had a bullish position in United Continental Holdings Inc (NYSE:UAL) at the end of June, down by four funds from the end of the previous quarter.

#1 Delta Air Lines, Inc. (NYSE:DAL)

– Number of Hedge Fund Shareholders (as of June 30): 94
– Total Value of Hedge Funds’ Holdings (as of June 30): $4.66 billion
– Hedge Funds’ Holdings as Percent of Float (as of June 30): 16.60%

With 94 funds in our database reporting long positions in the airline as of the end of June, Delta Air Lines, Inc. (NYSE:DAL) is the smart money’s top transportation pick. Delta reported better-than-expected earnings for its second quarter, with EPS of $1.47 versus estimates of $1.42. Despite missing revenue estimates by $40 million, investors mainly took a bullish view of the earnings report due to Delta management’s guidance for a third quarter system capacity increase of just 1%-to-2% year-over-year. Lower capacity increases in the industry should increase passenger revenue per available seat mile and profits. Ross Margolies‘ Stelliam Investment hiked its stake in Delta by 33% during the second quarter, to 6.02 million shares, which ranked the stock as the fund’s favorite.

Disclosure: None