XPO Logistics Is Expediting Its Growth Plan

Wall Street pros have nothing on retail investors who stake small sums of money monthly on undervalued small-cap stocks. Because they're mostly ignored by the big guns, these types of stocks offer the best outsize opportunities for growth.

I screened for stocks under $3 billion in market cap, offering earnings surprises of 15% or more in the previous quarter, with long-term earnings growth forecast to be at least 15%. One stock that floated to the top was third-party logistics specialist XPO Logistics (NYS: XPO) , whose CEO has a knack for turning small growth stocks into major industry stalwarts. Its earnings jumped 22% ahead of Zack's analyst expectations even as they still expect its earnings to grow 40% annually for the next five years. With a $305 million market cap, it easily makes it into our range for potential investment candidates.

Of course, don't jump on a stock just for those reasons. It should just be a starting point for more research as we need to look more closely to see whether analysts' faith in it is well-founded.

Get it on the go
Despite a near 4% rise in the Dow Jones Industrial Average in the back half of 2012, the Dow Jones Transportation Index is up just half of that over the same time frame. There's an investment theory that holds that without the latter at least keeping pace with the former, the economy is not as healthy as it might otherwise appear.

Still some transportation and logistics companies have done at least as well as the indexes, with shares of FedEx up 2% in the last six months, railroad operator Union Pacific up more than 8.5%, and trucking company Old Dominion Freight Line has risen more than 17%.

Yet there seems a lot to be worried about as UPS has fallen 2%, Norfolk Southern and CSX are both down around 10%, and Swift Transportation has tumbled 17%. The logistics shops like XPO and Air Transport Services Group are down, too, falling 5% and 25%, respectively.

Long road to nowhere
The problem is an economy weighed down by sluggish growth, along with Europe's financial house being in shambles and even China stumbling. And if the U.S. goes over the fiscal cliff as increasingly seems likely, Fitch Ratings estimates the economy will double-dip into a recession and unemployment will rocket to 10% again.

According to the Association of American Railroads, combined North American freight carload volume this year is down almost 2% over 2011 with nonmetallic minerals, coal, and grains down by double-digit percentages. On the other hand, petroleum products surged 50%, lumber was up 23%, and motor vehicles were up almost 14%.

A big umbrella
XPO has been trying to increase its market share in the logistics industry by rolling up rivals under its growing umbrella. It bought three companies this year each one getting progressively larger until its October purchase of Turbo Logistics reached $50 million.

It's not an unfamiliar road map CEO Bradley Jacobs is traveling. He took United Rentals from a small equipment rental company to a national force by buying up smaller shops and was doing the same thing with United Waste Systems until it was itself acquired by Waste Management. Typically the growth-by-acquisition strategy raises warning flags for me because of there are often problems integrating diverse corporate cultures. Acquisitions aren't a problem until they're a problem, but they do help a company grow in a hurry. Jacobs wants XPO to be a $4 billion to $5 billion company in just a few years' time, achieved largely through rolling up the industry.

The company admits several of its business segments are facing weak fundamentals, but because of the acquisitions it's making, it believes it is positioning them and the company as a whole for industry leadership.

A small price to pay
While there are risks inherent in the strategy its pursuing, it's hard to argue with the success Jacobs has generated in the past. It was one of the reasons why, upon his assuming the helm of XPO, I rated the logistics shop to outperform the market on Motley Fool CAPS, the 180,000 member-driven investor community that translates informed opinion into stock ratings of one to five stars. Since I weighed in on XPO Logistics a year and a half ago, the stock has soared 387% compared to an 8% rise in the S&P 500.

That might be slightly lower than the high points it hit in the past, but I expect XPO to recover, so I'll be maintaining my outperform rating on the stock. Let me know in the comments section below if you think that sometimes exceptions like XPO's acquisition strategy prove the rule that acquisition-crazy companies ought to be avoided.

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The article XPO Logistics Is Expediting Its Growth Plan originally appeared on Fool.com.

Rich Duprey has no positions in the stocks mentioned above. The Motley Fool owns shares of Waste Management. Motley Fool newsletter services recommend FedEx, United Parcel Service, and Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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