The bull market is rotating. Josh Brown says these transport names on his Best Stocks list will benefit
(This is The Best Stocks in the Market , brought to you by Josh Brown and Sean Russo of Ritholtz Wealth Management.) Josh — This summer marks the 250th anniversary of the United States, and I’ve been thinking about what made this country. Not the founding documents, not the rhetoric, the actual physical infrastructure that turned 13 coastal colonies into a continental economy. It was the railroads. They were America’s first stocks, the original reason ordinary people could own a piece of something bigger than themselves, and the reason Wall Street exists in the form it does today. The ticker tape was literally invented to transmit railroad prices. But railroads were (and are) incredibly capital-intensive. Without the stock market and the public’s enthusiasm for investing in these ventures, they never would have been built. The original Dow index from 1884 had 11 stocks in it, and nine of them were railroads (the other two were a steamship company and Western Union). The Dow Transportation Average was actually the first index and, as Sean will explain, investors have always paid attention to what these stocks were telling us. The bull market is rotating, and transports are showing up on our list of the Best Stocks in the Market right now. We’re going to walk you through what’s happening fundamentally with Union Pacific (UNP) , a transcontinental railroad company in the making, and J.B. Hunt Transport Services (JBHT) , the largest intermodal carrier in North America. And then, of course, the charts. Let’s go Knicks. As of June 15 , there are 193 names on The Best Stocks in the Market list. Top industries: Top 5 best stocks by relative strength: Sector spotlight: Transports Union Pacific Corp. (UNP): Sean — Rotation is the lifeblood of bull markets. Positive trailing returns outside of tech are not a bad thing! We are now seeing strength in the gritty areas of the market like transports and rails. Rails actually used to be the semis of the day — Charles Dow was using the rails to validate bull markets over a century ago. Union Pacific, chartered by Abraham Lincoln in 1862 (I had no idea about this the last time we wrote it up in May ), is now attempting to build America’s first true transcontinental railroad from coast to coast by acquiring Norfolk Southern. UNP is up 21.6% over the past year, 14.8% over the last six months, and 7.4% over the last three, putting it in a nice, consistent uptrend. Bull market intact. The pending Norfolk Southern acquisition, which would create a 50,000-mile transcontinental network, involves $20 billion in cash plus the issuance of 225 million shares, pending regulatory approval. UNP posted a record first quarter with revenue of $6.2 billion (+3% YoY), net income of $1.7 billion (+5%) and adjusted EPS of $2.93 (+9%). Bulk transportation led the way, with revenue up 10% on 12% volume growth driven by coal and grain exports to China and Mexico. Management affirmed a low double-digit EPS CAGR through 2027, with mid-single-digit EPS growth expected in the coming year. Josh — We’ve been following Union Pacific closely this year, and the thesis is playing out. On May 26 we wrote to you : “This is a decent risk-reward for a trade. We’re risking five points to see if this breakout sticks. There’s the potential for merger-related news to impact price so we just want to be aware of that context.” The $260 breakout held as support, and the stock has since pushed to $273. That recovery off the Liberation Day lows, where buyers stepped up almost to the day at the rising 200-day, has proven to be the real thing. Part of what’s been working in the background is the pending acquisition of Norfolk Southern. When a deal is announced, arb funds go long the target and short the acquirer to hedge the stock component of the transaction. That short pressure on UNP has been a quiet headwind for months. As those hedges get unwound, the short covering shows up as additional buying pressure in the stock. There’s still merger-related news risk in either direction, so that context is worth keeping in mind. RSI at 57 is neutral and fits the chart. Momentum is rebuilding, not running hot, which is exactly what you’d expect from a stock still working through a recovery phase. Traders can still use $260 as their line in the sand. A close back below it would be a reason to step aside. Investors can use the $248-$250 area, where the stock found support twice in mid-April before the breakout began. A move below $248 throws the uptrend off its tracks (pun intended) and puts UNP into a consolidation phase that we just don’t have the time or patience for. J.B. Hunt Transport Services, Inc. (JBHT): Sean — J.B. Hunt stock has been a monster up 107% over the past year, 37.7% in the last three months and +20.1% in the last month alone. This thing took off. JBHT owns trucks and contracts with railroads (it doesn’t own rail infrastructure). Its core strategy is actually converting freight from highway to rail and rail to highway. The spot rates tracking the cost of shipping have risen sharply since late Q4, a tailwind for pricing as contracts reprice. Add in the incremental volume and you’ll begin to understand why the stock is up 107% over the past year. Intermodal volumes (shipping containers back and forth) are at record levels, with March up 7% YoY and the Eastern portion of their network is gaining share from highway shipping (8% in Q1). JBHT also exceeded its cost reduction target, hitting a $130 million run rate in lower costs versus a $100 million goal. JBHT is gearing up for growth, targeting 800–1,000 truck additions this year supported by regulatory tailwinds and JBHT’s strong safety record. Josh – J.B. Hunt Transport Services is knocking on the door of $300, a round-number level that threw a blanket over the stock on an intraday basis last week. Beneath the price we have a rising 50-day acting as a reliable floor since the uptrend reasserted itself off the October lows. That’s the level buyers have consistently stepped up to defend, and there’s no reason to expect that to change. RSI at 69, which we would normally call “extended” but, given how long this stock has been constructively building, it’s understandable. We’ll just keep that in mind. Momentum has stayed elevated without flashing the kind of exhaustion signals that would give pause, which keeps the technical picture clean heading into what should be a decisive test of $300. Traders who want to play this one can keep a stop just below the recent consolidation near $270. Investors can anchor to the 50-day, currently at $253, which has served as the structural floor for this entire advance. The 200-day is almost 50% below today’s price – it may as well be in Guam so we’re not focused on that. DISCLOSURES: We currently own shares of JBHT for clients in our Porterhouse strategy. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL’S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.
