Trucking Industry – What’s Working In The Current Market? by Jay Kaplan, The Royce Funds
Portfolio Manager Jay Kaplan looks at three holdings in the trucking and transport industry, which is bucking the market’s downward trend in 2016.
Many small-cap stocks have been declining since last summer, battered by headlines expressing heightened concerns about the condition of the global economy. During this challenging period, we have been hunting for bargains, looking for what we think are strong long-term opportunities in several areas as valuations were growing increasingly attractive.
Year-to-date through the end of February, one of the Industrial sector’s industry groups—the road & rail category—was showing signs of life after struggling through much of 2015. We asked Portfolio Manager Jay Kaplan to discuss how he came to see a combination of high quality and attractive valuation in this group:
“Beginning in the spring of 2015, a handful of companies in the trucking industry began to look inexpensive to me. I generally like to focus on industries where expectations are low and where I see compelling bargains, which was the case for a few stocks in this group.
“Stock prices throughout the trucking industry were hit hard in 2015, first in spring and again later in the year. The market was concerned that the industrial economy was slowing down, and by the end of 2015-beginning of 2016, a lot of people were afraid it was heading toward recession.
“By mid-January 2016, many trucking stocks seemed to have priced in a recession that we weren’t in. In addition to these fears, there are regulatory changes taking effect in the trucking industry that should probably decrease supply a bit, making it more expensive for some of the smaller marginal players to keep up, especially with labor costs also rising.
“To me, this amounted to a potentially rewarding contrarian opportunity. So between, roughly, April of 2015 and January of 2016, I was able to invest in what I think are terrific businesses at prices I don’t see very often, with the potential for some of these companies to gain additional market share in the new regulatory environment.
“In Royce Small-Cap Value Fund I initiated a position in Saia during April of 2015 and Werner Enterprises during May. Later in the year, I also began to add to my position in Knight Transportation. As is sometimes the case, I bought early—each company’s stock declined further in 2015. But that’s part of the price you pay being a contrarian investor.
“Saia provides less-than-truckload (LTL—companies that transport relatively small freight) services throughout the U.S., has many underpriced routes, and is moving to eliminate routes that do not make economic sense. The company recently reported earnings and a full-year outlook that were both a bit better than many were expecting. I really like its potential going forward.
“Werner Enterprises is a truckload (TL—companies that carry large amounts of generally homogeneous cargo) carrier that does a lot of business with large retailers such as Wal-Mart and operates with many long-term contracts. With capacity likely to tighten, the company should benefit from this as its customers seek to lock in capacity now. I see Werner as a high-quality player in the TL space.
“Knight Transportation is also a TL carrier that operates primarily in the U.S. The company has more exposure to the non-contractual spot market, as opposed to longer-term, contractual business. I think those new regulations may cause spot-market prices to increase throughout 2016, which would benefit Knight’s business.
“The last several months have offered a good example of what I like to do when industries fall out of favor—I try to take the opportunity to buy high-quality companies when prices are falling because quality doesn’t go on sale very often. And if the economy picks up, I think we’re poised to do well in trucking.”