Last week, I told you about transportation stocks, a sector that the markets have been completely ignoring... as it's quietly beaten nearly every other sector in the second half of 2018.
But we're watching. My Best in Breed (BIB) model has been watching, too, which is why I'm so bullish, not only on the sector, but also on several of the stocks.
Today, let's wade a little deeper into this underappreciated, insanely profitable segment with two stocks that, along with my picks from Friday, round out the top 10 in the transports, as tracked by the iShares Dow Jones Transport Average ETF (BATS: IYT).
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I'm Crazy About These Railroad Stocks Right Now
Omaha, Neb.-based Union Pacific Corp. (NYSE: UNP) has been rolling along, gaining 45% in the past year.
Even looking at the shorter term, the shares are up 15% in the past two months, riding along the support of their 20-day moving average.
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In fact, the stock reached an all-time high last Thursday thanks to a run of nine of 10 positive trading days.
As you might have guessed from my trucking company recommendations, the impetus for my bullishness on Union Pacific can be found in the analyst ratings and short-interest data.
Both reflect a degree of skepticism that is hardly in line with this railroad's impressive chart.
The short-interest ratio for Union Pacific stands at a robust 5.4, which isn't screamingly high. But it's enough to trigger a short-covering rally, especially if the stock continues to establish new highs.
And only 41% - just 12 of 29 - of covering analysts rate Union Pacific a "Buy," compared to 50% three months ago. At some point, these analysts will tire of being wrong and start issuing upgrades.
They say stocks like to climb a "wall of worry," and I'd call robust short interest and minority analyst support a pretty sizable wall.
That tells me there's plenty of "reserve" buying power to keep Union Pacific on track to finish out the year on a positive note.
By the way - the stock has done just that during the past two years, averaging an 11% increase in the final quarters of 2016 and 2017.
To get ahead of those year-end profits, I like the UNP Jan. 18, 2019 $155 calls (UNP190118C00155000) or even the UNP Jan. 18, 2019 $160 calls (UNP190118C00160000).
That's for starters...
Our second railroad stock is Norfolk Southern Corp. (NYSE: NSC). Norfolk has been on a huge run that's covered more than 40% in just over five months.
The shares have used the tandem support of their 20-day and 50-day moving averages to set a series of new highs, the latest of which came just the week before last. Even Hurricane Florence can't seem to derail the company, which does much of its work in the southeastern United States.
The analyst and short-interest picture for Norfolk Southern is similar to that for Union Pacific, only more extreme. Norfolk's short-interest ratio is 6.3, so a short squeeze is likely, while just on 30% of covering analysts rate the stock a "Buy," leaving more than enough room for several upgrades.
With plenty of skepticism surrounding the stock, a continuation of the five-month rally will likely pull cash from the sidelines and add fuel to the buying fire.
And like Union Pacific, Norfolk Southern tends to do well in the final three months of the year, averaging 10.5% during the past three years.
To capture the move, the actively traded NSC Jan. 18, 2019 $180 call (NSC190118C00180000) is the option to consider.
Keep an eye on the transports. The fact that they're not getting the love they deserve means that the folks hopping aboard now are destined for much bigger profits than the crowd.
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About the Author
Chris Johnson (“CJ”), a seasoned equity and options analyst with nearly 30 years of experience, is celebrated for his quantitative expertise in quantifying investors’ sentiment to navigate Wall Street with a deeply rooted technical and contrarian trading style.