Transportation ETFs, including the SPDR S&P Transportation ETF (NYSEArca: XTN), make for predictable investment victims of the coronavirus outbreak, but XTN could be a valid rebound play.
XTN seeks to provide investment results that correspond generally to the total return performance of an index derived from the transportation segment of a U.S. total market composite index. The index represents the transportation segment of the S&P Total Market Index.
The transportation index is a key metric for analysts to watch in terms of assessing the health of the broad market. As far as any potential roadblocks for transportation exchange-traded funds, the coronavirus situation is certainly a potential danger, but selecting the right exchange-traded funds (ETFs) could relegate them to a mere speed bump.
“This year will likely be a train wreck,” according to the ETF Research Center (ETFRC). “Earnings are forecast to decline more than 50% and estimates are still falling fast. But our thesis on why XTN could make for a good rebound investment is based on three foundations.”
Taking On Transportation
There are already travel restrictions in place for international travel, the latest of which includes the UK, but the newest thoughts involve domestic travel. Airlines around the globe are scrambling to hoard cash as demand for flights tumbles after political leaders turn to increasingly more austere measures that have disrupted daily life in an effort to stop the spread of COVID-19.
While well-known amusement parks like Disneyland have been closed to park-goers, and most recently Apple announced they will be closing all stores outside of greater China for the better part of the month of March, now President Trump is pondering a travel ban on areas that are hard hit by the coronavirus.
While the travel and leisure stocks still facing considerable headwinds, the reopening of the U.S. economy, albeit gradual, could provide an assist to XTN.
“Reopening of businesses means goods flowing through the supply chain again,” said ETFRC. “Earnings for firms in XTN are forecast to grow 135% next year on a 10% pickup in revenue. Those estimates do not seem heroic: 2021E EPS is still less than what these firms earned in 2015.”
Additionally, data confirm XTN is cheap on valuation.
“Firms in XTN are trading at 1.3x book value, a slight uptick since the March lows but otherwise their cheapest multiple since 2012 (chart below). Meanwhile, shares are also about 10x forecast EPS next year, which again we think are conservative,” according to ETFRC.
For more on tactical strategies, please visit our Tactical Investing Channel.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.