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.