The stock market has been in correction mode since mid-January with the S&P 500 Index (NYSE: SPY) down nearly 13% at its nadir. The first part of the correction mostly impacted growth stocks and rate-sensitive securities. However, the selling broadened out and began to infect other parts of the market especially as recessionary risks have risen.
Therefore, we are seeing major weakness in certain parts of the economy especially those that have thrived during the pandemic. One of these is trucking. The sector performed very well as demand for goods increased, and bottlenecks led to surging rates. In turn, this attracted more supply. This, in addition, to the demand for goods slowing as the economy returns to normal, is leading to a major weakness in trucking stocks due to fears of a drop in demand coupled with oversupply.
As a result, we have seen major dislocations in trucking stocks across the board in the last couple of months. For example, JB Hunt (Nasdaq: JBHT) went from an all-time high in March to drop by 24% in a handful of weeks. Since, this drop, it's bounced modestly to recover about 15% of its losses.
JB Hunt's Q1 earnings report also came out following its steep decline, and there was nothing in it that would justify such a drop. Its first-quarter earnings were up 67% compared to last year and topped analysts' estimates by a significant margin. Revenue also beat expectations at $3.5 billion vs $3.3 billion and was up 27% compared to last year.
The combination of earnings growth and stock price decline has also led valuations to improve. For example, JB Hunt has a forward P/E of 17, a dividend yield of 0.9%, and is expected to grow earnings by more than 20% next year.
While it's certainly true that the supply of trucks has increased, it's also true that economic data continues to come in strong despite deceleration from unsustainably fast levels of growth. Some other positives are that industrial activity seems to be picking up speed after slowing over the last few months as new orders are starting to pick up. Additionally, auto production is also increasing as the chip production eases.
These are consistent with the thesis that trucking stocks will continue to outperform, and investors should consider buying the dip.