Trucking Firms – A Contrarian Trade
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An interesting trade idea that I just came across is a Covered Call on YRC Worldwide (YRCW). The trucking industry has had a great amount of consolidation and the charts are looking up. This trade is a bit contrarian since it involves being long the U.S. trucking industry, which has been hard hit over the past year due to high fuel prices. However things are beginning to look better for this industry. We are starting to see lower prices at the pump which is always a positive for transportation but the biggest positive fundamental factor is the fact that there are not as many trucks on the road. Over the past year more than 2000 trucking firms have gone out of business, loosing up to 100,000 trucks, according to the American Trucking Association. The industry contraction has given the remaining companies better pricing power and tonnage rates are going up. The ATA For-Hire-Truck-Tonnage Index rose 1.3% in June and .5% in May. This is also an early cycle play, demand has not picked up yet but with a major reduction in supply some analyst feel that earnings have probably hit bottom in 2008. Time will tell but for now the charts also look very promising.
YRCW put in a low for 2008 on March 19th at $10.99 and has moved sideways since with higher lows creating a gradual upward slope. The 20 & 50 day moving averages have crossed the 200 day and YRCW has been trading above the 200 day since August 5th. It broke above a long term trend line in April and has developed a gradual upward trending slope. Based on the improving fundamentals and technical’s I constructed the following covered call on August 22, 2008:
Bought to Open (BTO) YRCW @ $17.80 per share
Sold to Open (STO) Sept 2008 $17.50 call (YUXJE) @ $1.50 per contract.
Called return: 6.86% Uncalled: 8.43%
I believe this company has some longer term trading potential and is one to watch. Any pick up on the demand side and companies in this industry will take off to the upside.
Larry Gaines is from callsandleaps.com. This information is for educational use only and is not financial advice.
