Business cycles can be brutal.
Most industry participants suffer when the cycle turns down. The weaker companies exit the market, sometimes voluntarily, other times through bankruptcies. Stronger companies take advantage of their financial strength and can buy assets on the cheap and increase their market share. When the industry emerges from its doldrums, we see a more consolidated and concentrated market.
What is Ailing the Trucking Industry Today?
A number of macro-economic forces have converged to create a perfect storm for the truckers.
- There is excess capacity in the market driving the spot rates down. Trucking was strong until last year, and as a result companies added extra capacity
- There is a shortage of drivers in the market, driving the expenses up
- Trucking demand has fallen as the trade war continues and the imports have fallen. On May 9, US accelerated tariffs on Chinese imports. Between May 8 and May 16, the contracted freight volumes in Los Angeles (Asian import heavy port) dropped by 28%. The drop is 6% in the overall market.
- Oil prices are inching up this year (32% increase between Jan and May), with the outlook grim for the rest of the year
Trucking enjoyed a strong year in 2018 and the wheels have started to come off this year. The downturn is still in the early stages and has had its greatest impact in the spot market. Many small truckers operate in the spot market. Large carriers that have negotiated long term contracts are less affected. However as the downturn deepens, and bankruptcies spiral, and the long term contracts come up for renewal, we will see the larger carriers also taking a hit.
This article gives a good overview of the dynamics in the trucking industry today.
What does this Mean for Value Investors like You and Me?
Trucking stocks are getting cheap.
As we know, some stocks are cheap because they are in trouble. Other stocks are cheap because the industry is in trouble, but these companies are strong enough to survive or even grow their market share during the downturn.
A well placed investment can result in us buying a cheap stock close to the bottom, with the company growing much faster than the industry as the cycle turns up.
There are now cheap trucking stocks showing up in many value screens, and I am currently looking at a few.
The one thing we do not know is how long the cycle will continue to be on the downward path. Perhaps the stocks we buy today might get even cheaper in the next few months as the trouble in the industry spreads.
Regardless, the profit potential can be enormous, but you need to understand the possibility of sitting on losses for some time before you start making money. You also need to find financial strong companies in this weakening industry, the kind of companies that will survive and grow when other weaker companies fall.
I will be writing about some of these companies in the next few weeks.