Pick of the Week: YRCW

Over the past few months, our Picks-of-the-Week have been heavily weighted in several key sectors. Overall, we’re happy with the performance of these sectors especially as the broad market slips. However, there’s a more recent development in play: declining crude oil. Our picks are missing countertrend exposure to energy if oil declines to $100. In other words, how can you play falling energy prices?

There are several reasons you should consider the transportation sector.

First, Transport stocks often have negative correlation to oil. That means when energy goes down, Transports typically go up, and vice versa. Though oil was up today, the intermediate-term trend for crude is down. This is bullish for Transports.

Second, Transport stocks tend to lead economic recoveries. Why is that important? Because we may be in the early stages of a turnaround. Typical recessions last less than 12 months. Home prices have declined for two straight years. The credit crisis is at least a year old. Consumer confidence is near multi year lows. Bottom line, current economic woes are likely “priced into” the market. We’re not promising the end of woes, but if we are near the bottom, Transports are likely to be one of the first sectors to benefit from a turnaround.

Third, fundamentals for the industry are strong. Although railroad stocks are trading near 52-week highs, high gasoline prices have demolished trucking stocks. Still, trucks carry 70% of the nations manufactured and retail goods in the U.S. Moreover, demand is still high. The American Trucking Association (ATA) said total goods shipped by truck in the U.S. rose for the second consecutive month in June and hit its highest mark since February. Things are looking up for Transports.

There are several ways to play Transports in this environment. As we scanned the ETF and stock horizon, we found a unique pick that looks to gain not only from the rising sector, but also its own merits. YRC Worldwide (YRCW) is a global trucking company that employs over 60,000 people. YRCW carries goods through several trucking brands, but it’s more than just a respectable Fortune 500, small-cap stock.

YRCW is a turnaround play. Management is taking steps to improve the company. New key employees, new routes, altered benefits packages, are all bullish underpinnings for a solid play in transportation. Chairman and CEO Bill Zollars recently spoke about the company’s improved performance despite the challenging environment: “We remain confident that we are on the right track to enhance customer value as we implement network improvements (to) increase the efficiency and profitability (and) execute solidly at YRC Logistics.”

It’s difficult to find uptrend confirmation on YRCW’s chart. For instance, there was a solid breakout above congestion last Wednesday. But there hasn’t been a follow-through day since then. If the breakout resumes, you’re looking at a very attractive entry point for the stock. However, this pick is less a timed entry into YRCW than a play on macroeconomic conditions. To buy into falling oil, a recovering economy, and a turnaround stock, go with YRCW.

All the best.

Note:

Keep in mind, the Pick of the Week is usually intended for aggressive investors. Don’t risk money you can’t afford to lose. You will need to decide when (and if) it is time to sell.