The “free fall” suffered by transportation stocks in the past couple of weeks appears to have done its job of fully pricing in a freight recession, according to Deutsche Bank analyst Amit Mehrotra.
His call comes after the Dow Jones Transportation Average
tumbled 12.9% over the past 10 sessions through Tuesday, to sharply underperform the broader stock market as its sister index, the Dow Jones Industrial Average
lost just 3.0%.
Weighing on the transportation sector were worries about how inflationary pressures, including the Federal Reserve’s attempt to reign them in, will hurt economic growth. The start of the sector’s dives coincided with the first inversion of the yield curve in nearly three years, something many on Wall Street view as a precursor to recessions.
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Deutsche Bank’s Mehrotra had said last week in a research note that a period of “significant near-term volatility” was likely for transports as that market assesses “peak-to-trough” valuations. With the recent selloff, he said the market has already been “efficient” at pricing in a downcycle scenario.
“It appears we are mostly through this period of significant near-term volatility (for now),” Mehrotra wrote in a note to clients. “The implication is that transportation group appears to now be fully pricing in a freight recession.”
The Dow transports surged 1.7% in morning trading Wednesday, to outperform the Dow industrials, which gained 176 points, or 0.5%.
As part of Mehrotra’s call, he the recent selloff in J.B. Hunt Transport Services Inc.’s stock
has presented investors with a “buying opportunity.” As a result, he upgraded the trucker to buy from hold, and boosted his stock price target to $230 from $210.
He said in addition to his optimism regarding J.B. Hunt’s intermodal business, the company’s Dedicated Contract Services (DCS) and Integrated Capacity Solutions (ICS) brokerage businesses should be among the most resilient in a market downturn.
The stock, which had tumbled 19.6% over the previous 10 days, rallied 2.3% in morning trading.