Why XPO Logistics (XPO) Stock is a Compelling Investment Case

Argosy Investors recently released its Q3 2020 Investor Letter, a copy of which you can download here. Year-to-date performance was 15.5% in select accounts. The S&P 500 by comparison returned 5.5%. You should check out Argosy Investors’ top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.

In the said letter, Argosy Investors highlighted a few stocks and XPO Logistics Inc. (NYSE:XPO) is one of them. XPO Logistics Inc. (NYSE:XPO) is a global provider of supply chain solutions. Year-to-date, XPO Logistics Inc. (NYSE:XPO) stock gained 22.9% and on October 15th it had a closing price of $97.91. Here is what Argosy Investors said:

“I purchased shares of XPO Logistics (XPO) based on our research of the trucking logistics industry. I believe trucking at present is a commoditized and low-return business. XPO Logistics crown jewel is its LTL (Less-Than Truckload) business. Old Dominion Freight Line (ODFL) has been an extremely successful company over the last few decades and its stock price appreciation and valuation reflect that. Their focus is providing LTL services and XPO Logistics is among its primary competitors.

Route-based businesses in general can be attractive business models because of the local economies of scale they enjoy. From uniform rental companies like Cintas to pest control companies like Terminix and many more, these businesses benefit from high route densities. You might easily imagine how one route-based company A may have the same revenue as another, Company B, but if the travel between stops represents 100 miles for Company A and 40 miles for Company B, Company B will be able to generate the same revenue as Company A but with less employees and less fuel and vehicle maintenance costs, or alternatively generate more revenue than Company A but with the same labor, fuel, and vehicle maintenance.

LTL logistics fit this route-based density model because the nature of LTL shipments requires combining multiple shipments together into full truckloads. The more customers an LTL shipper has, the more it is able to group those shipments together efficiently at warehouses. These warehouses group shipments heading to the same area together, and enable XPO to fill its trucks heading to any given destination as much as possible.

LTL and related services represent 2/3 of XPO’s revenue and truckload logistics (the commoditized piece) represents the rest. I think XPO’s investments in technology could enable additional benefits on the truckload side in the long-term, but I am not betting on that.

What is strange is that ODFL and XPO have roughly the same LTL revenues, but ODFL is valued at $23 billion, while XPO is valued at $13 billion. XPO is less profitable and growing more slowly than ODFL, which certainly accounts for some portion of the gap. Our bet is that XPO is highly motivated to close the performance gap over time, which would provide a double benefit because profits would increase at an accelerated rate and the market might value the business closer to where ODFL trades.”

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In Q2 2020, the number of bullish hedge fund positions on XPO Logistics Inc. (NYSE:XPO) stock increased by about 11% from the previous quarter (see the chart here), so a number of other hedge fund managers believe in XPO’s growth potential. Our calculations showed that XPO Logistics Inc. (NYSE:XPO) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

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Disclosure: None. This article is originally published at Insider Monkey.