We recently compiled a list of the 11 best cargo stocks to buy right now, and in this article we'll look at how United Parcel Service (NYSE:UPS) stands relative to other cargo stocks.
The Red Sea Crisis and Shipping Challenges
The Red Sea accounts for 30% of the world's container trade through the Suez Canal. According to a JP Morgan report, the Houthi attacks have disrupted the entire supply chain, forcing companies to detour around South Africa, adding 4,000 miles to every journey. The rerouting will increase shipping times by nearly 30% and reduce global container capacity by nearly 9%. The report suggests that spot rates are surging amid the crisis. Spot rates from China to the US West and East Coasts rose 140% to 120% in January 2024 compared to November 2023. Jamie Dimon's investment bank expects trade disruptions to increase global core commodity inflation by 0.7 percentage points and overall core inflation by 0.3 percentage points.
Reuters reported on May 6 that shipping giant Maersk expects the crisis to reduce industry capacity between Asia and Europe by about 20% in the second quarter of 2024. Major shipping companies are rerouting to bypass Africa, leading to higher shipping costs and transit times. According to a Danish shipping group, shipping costs between Asia and Europe are now rising by 40% per voyage. While experts expect the crisis to subside by the end of 2024, the uncertainty and risks associated with the future of shipping are putting a strain on major shipping companies. To address bottlenecks and speed up voyages, companies are increasing their shipping capacity. The company has released more than 125,000 additional containers so far. Read our article on the countries at the forefront of logistics.
Disruptive technologies for the freight industry
While the Red Sea crisis has been a major headwind for the freight forwarding industry, technological advancements will be game-changing for the growth of the sector. Companies like GXO are revolutionizing the industry using technology. Also, take a look at the richest billionaires in the logistics industry.
The company deployed its robots on May 14 for a global sporting goods retailer in France. The robot solution was designed to reduce order processing times and improve response times to seasonal volume changes. The solution is deployed across 12,000 square meters of the site. The solution includes 500 autonomous mobile robots managing 70,000 bins in 5.5-meter-tall storage racks. The company plans to increase its automation and technology systems by 50% in 2023 and is actively working on integrating machine learning and artificial intelligence. The following is a comment from the company's Q1 2024 financial results announcement:
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“Automation is a key pillar of our value proposition. We have been pioneers in piloting the integration of cutting edge automation such as humanoids and AI within the four walls of our warehouses. We have recently introduced some exciting innovations in AI. First, the warehouse optimization pilot that I talked about last quarter was successful, increasing productivity by around 15%. We are now rolling out this app across our locations. Second, we recently piloted a unique workforce management tool that we developed in-house. Our tool makes over 15 million decisions per minute, making our inventory replenishment more efficient and adding around 7% capacity at no additional cost. We plan to deploy this solution more broadly across our operations starting this year.”
Now that you've learned about the freight shipping industry, let's talk about the best freight shipping stocks to buy right now. Also, read our article on the best shipping stocks to buy.
Our Methodology
To determine the 11 best cargo stocks to buy now, we looked at our own rankings, similar rankings on the Internet, and three transportation ETFs. We created an initial pool of 30 cargo stocks and selected the top 11 with the most hedge fund holdings as of the first quarter of 2024. Why are we interested in stocks that hedge funds are flooding? The reason is simple: our research shows that you can outperform the market by mimicking the top holdings of the best hedge funds. Our quarterly newsletter strategy selects 14 small and large stocks each quarter, which have returned 275% since May 2014 and outperformed the benchmark by 150 percentage points. (Learn more)
A warehouse filled with boxes of goods, symbolizing the company's reliable logistics services.
United Parcel Service (NYSE:UPS)
Number of hedge fund holders: 43
United Parcel Service Inc. (NYSE:UPS) ranks #7 on our list of best cargo stocks to buy now. United Parcel Service Inc. (NYSE:UPS) is a global shipping and logistics company based in the United States. The company offers freight transportation services as part of its supply chain solutions. The company provides air freight services to more than 220 countries, transports ocean freight on 2,300 routes, and offers less-than-truckload ground freight.
As of the end of the first quarter of 2024, 43 hedge funds disclosed holdings in United Parcel Service (NYSE:UPS). These shares are worth a total of $969.77 million. As of March 31, Ken Griffin's Citadel Investment Group was the company's largest shareholder, holding shares worth $433.48 million. As of March 31, United Parcel Service (NYSE:UPS) had $3.3 billion in cash flow from operations and $2.3 billion in free cash flow, giving it a strong financial profile that allows it to pay a high dividend with a 4.71% yield. In the first quarter of 2024, XPO (NYSE:XPO) returned $1.3 billion in dividends. Below are some comments from Artisan Partners' first quarter of 2024 investor letter:
“Despite secular growth tailwinds from the secular shift to e-commerce, the shipping business remains cyclical and disappointments will occur. However, we welcomed the market's short-term focus as it provided us with an opportunity to buy UPS at an affordable price below 11 times our assumed normalized earnings. UPS is a great transportation business that easily earns its cost of capital, generates significant free cash, has a broad economic wall of defense, has a strong financial profile and pays an attractive dividend yield of 4%. With the new five-year labor agreement complete, we believe UPS can focus on regaining lost volume and improving its cost structure.”
On April 23, United Parcel Service (NYSE: UPS) announced that its first quarter fiscal 2024 results outperformed the market. The company beat expectations by $0.09 with sales of $21.7 billion and earnings per share of $1.43. Analysts expect the company to grow earnings by 18.68% over the next 12 months and 6.8% over the next five years. In 2024, the company expects its DAP global revenue to be approximately $3 billion. The company's technology capabilities differentiate it from its competitors. The company used new driver dispatch technology to reduce pickup concerns by 74% and achieve a Net Promoter Score of 48. International customers using the next generation brokerage solution since April 2023 reported a 40% decrease in customer brokerage holds. For 2024, XPO, Inc. (NYSE:XPO) expects consolidated revenues to be between $92 billion and $94.5 billion and consolidated operating margins to be between 10% and 10.6%.
Overall, UPS ranks seventh on our list of the best cargo stocks to buy. To see other cargo stocks that hedge funds are watching, see “The 11 Best Cargo Stocks to Buy Now.” While we acknowledge UPS's potential as an investment, we believe AI stocks have a better chance of delivering higher returns in a shorter time frame. If you're looking for AI stocks that are more promising than UPS but still trade for less than five times their earnings, check out our report on the cheapest AI stocks.
Read next: Analyst sees new $25 billion 'opportunity' in NVIDIA, Jim Cramer recommended these 10 stocks in June.
Disclosures: None. This article was originally published on Insider Monkey.
