Low Demand Puts Brakes On Trucking Sector, But Transportation ETF Should Survive

Transportation stocks are having trouble truckin’ on, as demand is low, but the Dow Jones Transportation Average (IYT) exchange traded fund’s (ETF) low concentration in trucking should insulate it.

Wachovia Corp. cut its ratings on the sector on the possibility that demand is slowing, reports Jeff Kearns for Bloomberg. The downgrade is telling, as one analyst notes that we’re entering what would ordinarily be the peak shipping season.

Werner, a leading trucking and logistics company in North America and China, along with Knight, were lowered to “market perform” from “outperform,” while the overall industry’s rating has been reduced to “market weight” from “overweight”.

Meanwhile, the S&P trucking index fell 3.9% yesterday after gaining 13% this year.

Ryder System, Inc. (R), the country’s largest truck-leasing company, lost the most in a month. The company is 4.8% of IYT. UPS (UPS) is also facing some woes: last month it announced a 21% drop in profit along with a hiring freeze. Rising fuel costs and reduced consumer spending are blamed for many of the troubles. UPS is 6.8% of IYT.

Fortunately for IYT, the fund isn’t heavily weighted in the trucking segment of the transportation sector. However, trucking’s woes could be the railroads’ gain, especially since locomotives get more mileage out of a gallon of diesel than trucks do. Railroads make up much of the top holdings in the fund, including Burlington Northern Santa Fe (BNI), 11.4%; Union Pacific (UNP), 9.8%; and CSX (CSX), 5.4%.

IYT is up 10.2% year-to-date.

For full disclosure, some of Tom Lydon’s clients own shares of IYT.

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