This Just In: Upgrades and Downgrades -- Transports

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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Wall Street zigs, Jefferies zags
Over the past three months, shares of Canadian National Railway (NYS: CNI) have enjoyed a near 8% gain. Transports bellwether UPS (NYS: UPS) is up 10%, while its roadworthy rivals FedEx (NYS: FDX) and J.B. Hunt (NAS: JBHT) have done even better, racing ahead to grab 22% gains.

What do these four stocks have in common? Well, most obviously -- and luckily, for early investors -- they're all involved in the transportation of goods. Just a few months ago, this was looking like a bad business to be in. But as pessimism over the fate of the economy hit its zenith, one analyst stepped out in front of the freight train (or tractor-trailer, if you prefer) to argue that the negativism had to stop. The bad news was overblown, argued Jefferies & Co. "U.S. freight flows had started to strengthen," and it was time to invest in a few good transport stocks.

Turns out they were right ... and that's why investors should be nervous today.

Time to zag again?
Last time around, Jefferies was right about FedEx, UPS, and all the rest. But now, the analyst has changed his mind. Warning that "short-cycle indicators recently turned negative," Jefferies pulled its buy ratings on FedEx, UPS, and J.B. Hunt this morning. (Jefferies actually dropped Canadian National all the way to "sell," but, according to StreetInsider.com, this is primarily because the analyst believes investors will be shifting their bets from Canadian National to Canadian Pacific (NYS: CP) , citing "activist pressures" that give the latter stock a better catalyst for growth.)

But Canadian National/Pacific aside, is Jefferies right about the rest of these stocks? Is it time to put them on the shelf?

A recent report out of the Ceridian-UCLA Pulse of Commerce Index suggests it may be. The report, which tracks "real-time diesel fuel consumption" as a proxy for the transport sector, shows that growth in the industry continues remains at near-stall levels. After rising a significant 1.1% in October, the Index has shown anemic growth levels of 0.1% in November and 0.2% in December. While these numbers are "positive," they're only barely so -- and seem far too low to support the kinds of double-digit stock price gains we've seen at FedEx, for example.

Foolish takeaway
When you consider that UPS is now selling for 18 times earnings (despite a mere 12% long-term growth forecast), that J.B. Hunt costs 24 times earnings (albeit at a healthier 18% growth forecast), you have to wonder if the bulls have gotten a bit carried away with their stampede into transports these past few months.

Sure, FedEx looks more reasonable at 16 times earnings and a projected 16% growth rate. But here's the key: All three of these stocks (and Canadian National as well -- let's not let them off the hook) are currently generating significantly less free cash flow than they report as net income. None of them is as profitable as they look. FedEx in particular, with just $606 million in trailing free cash flow, appears terribly expensive at a price-to-FCF ratio of nearly 47.

So FedEx? UPS? J.B. Hunt? Personally, I wouldn't buy any of them at today's prices. And Jefferies is right to be telling you to avoid them.

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At the time this article was published Fool contributorRich Smithdoes not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 338 out of more than 180,000 members. The Motley Fool owns shares of FedEx and United Parcel Service.Motley Fool newsletter serviceshave recommended buying shares of Canadian National Railway and FedEx.We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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