Transportation stocks have benefited from AI investors' flight from AI. Are they worth buying?

The Dow Jones Transportation Average, a sectoral transportation index that includes companies such as CSX, FedEx, Old Dominion Freight Line and United Airlines, has outperformed the broader S&P 500 index of U.S. stocks by 13 percentage points over the past month and a half through today - for a sectoral index, it was the most significant outperformance of the S&P 500 since the 2008 financial crisis, Bloomberg wrote.

The Dow Jones Transportation Average lost 5.9% in trading on Feb. 12, suffering its biggest one-day drop in points and percentages since April 3 of last year, MarketWatch notes . Transportation stocks had been on a strong upward trend through Thursday.

The attractiveness of "old economy" companies - traditional industrial giants that have existed for decades - is boosted by the growing trend toward asset diversification, Bloomberg wrote: investors are reducing stakes in technology companies that have dominated the market in recent years and are looking for alternatives in sectors less exposed to AI. The transportation sector is increasingly seen by market participants as "AI-resistant" because its basic functions cannot be replicated by technology, the agency pointed out.

"The tech sector is so big that if you shrink its market share a little bit and put that money into other, much smaller areas, it will grow rapidly," Bloomberg quoted Roth chief technology strategist Joe Xi O'Hara as saying.

In addition, the Dow Jones Transportation Average has been supported by strong economic data in recent days, the agency noted. Thus, the report of the Institute for Supply Management released on February 2 showed that manufacturing activity in the U.S. in January expanded at the fastest pace since 2022. After the publication of these data at the close of trading on February 10, the Dow Jones Transportation Index updated the historical maximum, Bloomberg writes. It also rose a little more on Wednesday, February 11, when a strong employment report confirmed the recovery of the labor market in the United States.

Transportation is one of the most sensitive market sectors to economic activity, as production growth directly means growth in the need to transport goods, says Samir Samana, head of global equities at Wells Fargo Investment Institute, Bloomberg writes. In his opinion, the combination of a strong economy and capital flow from the AI sector strengthens the investment attractiveness of U.S. transportation companies.

Nationwide Chief Market Strategist Mark Hackett agrees with the Wells Fargo analyst: growth in demand in the manufacturing industry "by definition" leads to an increase in the need for transportation, the expert noted. In addition, the high demand for transportation serves as an important signal for investors who seek to invest in companies that are the first to benefit from the economic recovery.

However, not all analysts are so optimistic. For example, Ariel Rosa of Citigroup in early February downgraded recommendations on four trucking companies, including Old Dominion (from "buy" to "neutral"), indicating that the improving economic situation is "largely already factored" into current stock prices, Bloomberg notes.

Greg Swenson from Leuthold Group also considers the situation in the aviation, railroad and cargo segments "ambiguous". However, he admits that the sector may grow in the future, Bloomberg writes.

Benchmark analyst Christopher Kuhn noted that the Institute for Supply Management's manufacturing index (ISM) has only been in a growth phase for a month, but if transportation demand continues to increase, companies will be able to quickly convert that into financial results. He said even small increases in revenue, volumes and prices can lead to significant increases in net income in the sector.

MarketWatch data show that the majority of analysts are positive about the future of companies involved in transportation: the majority of ratings on the securities of UPS, FedEx, CSX, - "Overweight", which corresponds to the recommendation "buy". The majority of analysts (20) assign a "Buy" rating to United Airlines.

Investor interest in traditional market sectors is intensifying amid concerns about an AI bubble forming in the market and doubts about whether AI will be able to deliver the promised productivity gains and justify multi-billion dollar investments.

This article was AI-translated and verified by a human editor