Skylands Capital’s Top Transportation Stocks for Q3

The performance of U.S. transportation stocks has mostly trailed the broader market thus far in 2016. The S&P Transportations Select Industry Index has returned 8% since the beginning of the year compared to the 6% return generated by the S&P 500 benchmark. The rate of personal consumer expenditures has been on a decline over the past few years and the U.S. economy seems to be struggling to keep demand high. As demand and consumer spending for goods and services decline, so does the demand for transportation services. But that doesn’t necessarily mean that there aren’t attractive investment plays within the U.S. transportation industry.

Insider Monkey decided to compile a list of transportation stocks favored by Charles Paquelet’s Skylands Capital LLC, a list that may contain some attractive investment opportunities that investors should not pass up. Skylands Capital is a Milwaukee-based long/short equity investment firm that manages four long-biased long/short portfolios, as well as long-only assets. The asset manager’s portfolio construction takes into account how macroeconomic trends are affecting individual companies and industries, so the five transportation stocks included in the forthcoming list may be poised to deliver strong returns in the foreseeable future.

At Insider Monkey, we track around 765 hedge funds and institutional investors. Through extensive backtests, we have determined that imitating some of the stocks that these investors are collectively bullish on can help retail investors generate double digits of alpha per year. The key is to focus on the small-cap picks of these funds, which are usually less followed by the broader market and allow for larger price inefficiencies (see more details).

#5. Delta Air Lines Inc. (NYSE:DAL)

– Shares Owned by Skylands Capital LLC (as of June 30): 242,550

– Value of Skylands Capital LLC’s Holding (as of June 30): $8.84 Million

Skylands Capital upped its position in Delta Air Lines Inc. (NYSE:DAL) by 14% during the June quarter to 242,550 shares. The increased position was valued at $8.84 million at the end of June and accounted for 1.4% of the value of the asset manager’s equity portfolio. The second-largest U.S. carrier has seen its market value plunge by 23% since the beginning of the year, as falling fares, terrorism fears and currency swings are hindering carriers’ growth prospects. Delta’s passenger unit revenue dropped by 4.9% year-over-year in the second quarter, worse than the 2.5%-to-4.5% decline previously anticipated by the airline. Delta anticipates the key industry benchmark to decline in the range of 4%-to-6% in the third quarter, so the company needs to get unit revenue back on a positive trajectory to achieve its long-term financial targets and satisfy investors. Delta shares look like a bargain at the moment, with the stock changing hands at around 6.6-times forward earnings. Ray Carroll’s Breton Hill Capital acquired a new stake of 22,087 shares of Delta Air Lines Inc. (NYSE:DAL) during the second quarter.

#4. CSX Corporation (NASDAQ:CSX)

– Shares Owned by Skylands Capital LLC (as of June 30): 372,300

– Value of Skylands Capital LLC’s Holding (as of June 30): $9.71 Million

The Milwaukee-based asset manager trimmed its stake in CSX Corporation (NASDAQ:CSX) by 18% during the April-to-June period, to 372,300 shares, with the reduced stake being worth $9.71 million on June 30. The provider of rail-based transportation services managed to deliver better than anticipated second quarter results despite being hit by the slumping U.S. coal market. The Florida-based railroad had extracted more than 30% of its revenue from coal operations before 2012, but that percentage fell dramatically to only 15% in 2016 as the fossil fuel is being replaced by cheaper and cleaner-burning natural gas. CSX Corporation (NASDAQ:CSX)’s cargo volume declined by 9.3% year-over-year amid the challenging industry conditions, which are anticipated to persist through the end of the year. Fresh data shows large U.S. railroads saw cargo traffic decline by 8.3% in the second quarter. CSX shares are up by 9% thus far in 2016. Steve Cohen’s Point72 Asset Management was the owner of 4.48 million shares of CSX Corporation (NASDAQ:CSX) at the end of March.

Let’s head to the second page of this article where we’ll discuss three other transportation stocks favored by Skylands Capital.

#3. AMERCO (NASDAQ:UHAL)

– Shares Owned by Skylands Capital LLC (as of June 30): 35,415

– Value of Skylands Capital LLC’s Holding (as of June 30): $13.27 Million

The hedge fund firm run by Charles Paquelet also reduced its exposure to AMERCO (NASDAQ:UHAL) during the three-month period ending June 30, by 15%. The 35,415-share stake was valued at $13.27 million at the end of June. The parent company of U-Haul International, North America’s largest “do-it-yourself” moving and storage operator, has seen the value of its stock gain 15% in the past year. The company’s self-moving equipment rental revenue increased by $151.6 million during its fiscal year 2016 that ended March 31, to $2.30 billion, as AMERCO continues to focus on expanding its retail distribution system and growing its rental equipment fleet. AMERCO shares are currently changing hands at around 13.2-times expected earnings, meaningfully below the forward P/E multiple of 18.4 for the S&P 500 Index. Cliff Asness’ AQR Capital Management had 122,121 shares of AMERCO (NASDAQ:UHAL) among its holdings at the end of the first quarter.

#2. Norfolk Southern Corp. (NYSE:NSC)

– Shares Owned by Skylands Capital LLC (as of June 30): 176,200

– Value of Skylands Capital LLC’s Holding (as of June 30): $15.00 Million

Skylands Capital owned 176,200 shares of Norfolk Southern Corp. (NYSE:NSC) at the end of the June quarter, 16,350 shares more than it did at the end of the March quarter. The upped stake was worth $15.00 million at the end of the second quarter and made up 2.5% of the value of the hedge fund’s equity portfolio. Earlier this year, Canadian Pacific Railway Limited (USA) (NYSE:CP), Canada’s second-largest railroad, abandoned efforts to buy Norfolk Southern amid strong opposition from Norfolk executives, shippers, U.S. politicians, and rival railroad companies. Norfolk Southern recorded first quarter railway operating revenue of $2.4 billion, down by 6% year-over-year due to reduced fuel surcharge revenue and volume declines driven by lower coal volumes. The shares of the railroad are up by 11% since the start of 2016. Dmitry Balyasny’s Balyasny Asset Management added a 1.55 million-share position in Norfolk Southern Corp. (NYSE:NSC) to its portfolio during the March quarter.

#1. Union Pacific Corporation (NYSE:UNP)

– Shares Owned by Skylands Capital LLC (as of June 30): 577,900

– Value of Skylands Capital LLC’s Holding (as of June 30): $50.42 Million

Union Pacific Corporation (NYSE:UNP) was the second-largest holding in Skylands Capital’s portfolio at the end of June and its largest holding in the transportation sector, accounting for 8.2% of the value of its equity portfolio. The Milwaukee-based long/short equity investment firm cut its stake in Union Pacific by 12% during the second quarter to 577,900 shares, which were valued at $50.42 million at the end of the quarter. The No. 1 U.S. railroad has seen its market capitalization gain 18% so far in 2016. Just recently, United Pacific said its second quarter earnings fell by 19% year-over-year to $979 million, as freight demand remained soft, which also pushed the company’s top-line down by 12% year-over-year to $4.77 billion. Just recently, analysts at Deutsche Bank downgraded the railroad operator to ‘Hold’ from ‘Buy’ and maintained their price target of $94 on it, saying that railroads are not likely to experience short-term volume growth due to the strength of the U.S. dollar, high inventory, and increased uncertainty in the global economy. Ken Fisher’s Fisher Asset Management owns 126,604 shares of Union Pacific Corporation (NYSE:UNP) as of June 30.

Disclosure: None