What’s the Big Stock Play for the Rest of 2021? Try Transports

Which types of stocks will have legs as the recovery really kicks in? During an expected robust economic expansion in 2021’s second half, transportation stocks will have their run.

So says Tom Lee, a widely followed strategist. In his view, the tech hotshots that dominated last year will have less appeal, and the same goes for the consumer defensive names that have done fairly well, too, amid the stay-at-home ethos. Right now, investors are still too heavily tilted toward growth and consumer defensive companies, he told CNBC.

For Lee, the co-founder of Fundstrat Global Advisors, the sweet spot will be transports, like United Parcel Services, because they have the most to gain from a vibrant economy where more and more goods need to be delivered. He urged investors to jump aboard.

Of course, they already have. UPS’s stock has doubled over the past 12 months, as it shipped packages galore to housebound Americans. The delivery colossus reported Tuesday that it had a 27% year-over-year revenue growth in the first quarter. To Lee, there will be no slowing down for UPS or its sector.

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Indeed, tech stocks already show signs of fatigue, even though they still are ascending, albeit at a less torrid pace. According to Yardeni Research, they are up 9.7% this year, versus a scorching 43.9% in 2020. In other words, they have a long way to go to equal last year’s showing. If techs grow at only the current rate, they would not come close to 2020’s performance.

The downshift is even more pronounced for consumer staples, the epicenter of defensive plays: They have risen just 1.3% in 2021, compared to 10.7% last year.

But the trajectory is different for transports: They are up 16.1% year-to-date, not that far from 2020’s 22% showing.

“I think there’s a demand surprise that’s being communicated through the commodity prices surging,” Lee said, pointing to the spiraling price of lumber owing to the housing boom. “I think oil is hinting that there’s going to be quite a big consumer recovery, too, so I actually think it’s a bullish sign.” Oil and other commodities need to be shipped, you see.

“If I was to put it into a strategy, I think it just means you’ve got to be more cyclically tilted, and I think investors are too focused on growth stocks and defensives right now,” added Lee, who’s also Fundstrat’s research chief.

Transportation stocks can be divided into two: those that carry people, and those that convey freight. Hence, airlines are the weakling of the bunch. Still, the carriers do seem to be regaining bookings lately. Beyond these, we’re talking about air freight, logistics, trucking, and railroads—all areas that benefit from shipping more goods in a humming economy.

“Transports are an important group to watch because it’s a barometer of the economy, and I think it really is a leading sector,” Lee said.