This Freight Stock Just Got an Upgrade and Institutional Buyers

Key Points

• Shipping stocks are about to go on a massive bull run, or so do futures traders expect. 
• Jobs are flowing to transportation, and interest rate cuts will only increase demand for shipping quotes.
• ZIM Integrated is the best (and cheapest) option to take advantage of the situation.

Investment houses like The Goldman Sachs Group Inc. NYSE: GS have an average winning ratio of over 85% in their trading business. You can wonder how they achieve these results, or you can rest assured that their idea-generation process relies heavily on a “top-down” analysis. Today, you will see what these professionals may be looking at.

This process leads to a peaking interest in the transportation sector for reasons that will become clear shortly. By using MarketBeat’s research tools, you can start to screen for stocks in this space. Before you get in the weeds of it all and make your own selection, remember that ZIM Integrated Shipping Services NYSE: ZIM is a standout deal at a ridiculous discount today.

With shipping and freight quotes moving, stocks like ZIM will likely see a boost in their earnings per share (EPS) coming in the following quarterly results. Being only one of many reasons to believe in the stock, you will find out why Wall Street analysts upgraded their price targets on the stock, coupled with some institutional buying.

Starting at the Top

For the best picture of the current economic environment, traders may look to the PMI index of ISM manufacturing. While one month of data can give you great insights, you should take more than a couple of months to tune into the market’s wave.

Digging in, you will see that the transportation equipment industry has broken out of its December contraction and is now expanding for two consecutive months. Knowing that each quarterly earnings report contains results for the past three months, you can probably guess that stocks exposed to shipping (and its rising rates) can beat earnings expectations.

According to employment data from the past month, the United States economy added 275,000 jobs. Out of those, 19,700 (or 7.2%) went to the transportation and warehousing industry. Now, why else would hiring managers and logistics planners go on a hiring spree if not for the expectation of busier times ahead?

Now that geopolitical tensions are rising in the Hamas strip, Israel-based ZIM Integrated stock suffers from a temporary contraction. The stock trades at 89% of its 52-week high, whereas competitors like Kirby Co. NYSE: KEX and Scorpio Tankers Inc. NYSE: STNG trade at 100% and 95%, respectively.

The lackluster performance definitely needs to reflect rising shipping rates today. According to futures contract data from CME Group Inc. NASDAQ: CME, traders are bidding contracts higher for May and June 2024.

These expectations also align with the FedWatch tool, which is pushing for interest rate cuts priced for those same months. If the Federal Reserve (the Fed) lowers interest rates by those dates, global shipping and freight quotes will likely go as high as traders expect due to more global commerce.

Screen for the Best

You now know that ZIM Integrated shows a discount to competitors, but is it cheap for a reason? It is probably a hiccup due to conflicts affecting shipment routes. You will see ZIM earning some love by refreshing the list of stocks recently upgraded by analysts.

Those working for Jefferies Financial Group Inc. NYSE: JEF see a valuation of up to $20 a share for ZIM. These price targets reflect a near 72% upside from the stock's current price.

But valuations aren’t the only thing making ZIM the top pick in the space. These analysts expect the stock’s EPS to grow by as much as 30% over the next twelve months, significantly higher than the industry’s 14% average.

Knowing that the industry trend is favorable and the global landscape is set for ZIM to likely beat its subsequent quarterly earnings, some institutional buyers have started to buy the stock. Barclays added 19.8% to its $1.1 million position in ZIM this month, but that’s not all.

Charles Schwab Co. NYSE: SCHW also added 75% to its larger $2.9 million already in the stock. In a vote of confidence for industry-leading growth, these asset managers see the writing on the wall, double-digit ‘unjustified’ discounts.

On a price-to-book (P/B) valuation basis, ZIM Integrated stock trades at a discount of 50% to its book, or a 0.5x ratio. On the other hand, competitors Kirby and Scorpio trade at respective 1.7x and 2.8x ratios. This spread makes ZIM a ridiculous discount based on a fear-driven market.