Opportunities in transportation

Fidelity portfolio managers are making investment moves on land, sea, and air.

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Key takeaways

  • Opportunities are emerging from a new wave of safety, convenience, and driver-assistance software that is making its way into cars.
  • Many aerospace companies are primed for growth after using the difficulties of 2020 to cut costs and improve their competitive positions.
  • Port congestion on the West Coast presents opportunities for companies that can alleviate port demand.

Transportation stocks have been on the move this year, despite crosscurrents that complicate the industry's outlook. With ports still jammed, air travel continuing to be impacted by new COVID variants, and oil prices at pre-pandemic levels, it's important for investors to be selective. That may mean looking beyond some of the larger established names to emerging players.

Fidelity fund managers who specialize in the transportation sector tell Viewpoints they have been focused on finding innovative companies that have emerged as problem solvers during the last year. These companies could not only be addressing short-term problems brought by the pandemic, but also inventing solutions to future industry challenges.

By land, air, and sea, here are some areas where Fidelity fund managers see opportunities.

On the roads

Behind the manufacturers whose logos are on the cars are smaller automotive technology companies focused on driving innovation. Even with a global microchip shortage cutting vehicle production, these companies are primed to make lasting changes in the cars we drive next.

There's a new wave of safety, convenience, and driver-assist technology making its way into a wide variety of cars planned beyond model year 2021, says Fidelity's Elliot Mattingly, manager of Fidelity® Select Automotive Portfolio (FSAVX).

"I see opportunities to invest in growing component makers with a diversified set of customers, many of which have fairly low valuation multiples," says Mattingly.

"I'm always looking for stocks I think have long-term upside, and I'm increasingly finding them among some of the system suppliers, which are lesser-known firms with comparatively lower-priced stocks."

Looking ahead, Mattingly says he's keeping a watchful eye on technology investments that seemed like science fiction just a few years ago. "I'm doing the research and staying on top of these trends while trying to pick up stocks with good prices and solid prospects for the longer term," Mattingly says.

For example, Mattingly invests in auto supplier Aptiv (APTV), which makes a variety of components used in electric vehicles. The Dublin-based company's systems are designed to save both space and costs, Mattingly says. The fund also invests in Canada's Magna International (MGA), which makes electric vehicles on a contract basis for various manufacturers.

In the air

The COVID-19 pandemic hit aerospace companies particularly hard. Instead of racking up frequent flier miles, many would-be travelers spent their time at home. But next year could be quite the opposite, according to Jed Weiss, manager of the Fidelity® International Growth Fund (FIGFX). He believes the current uptick of spending on travel and experiences will continue into next year.

He notes that many airlines and aerospace companies alike used the difficulties of 2020 to cut costs and improve their competitive positions so they would be in better financial shape once business returned.

A big name in the industry, European commercial aircraft manufacturer Airbus (EADSF), is one such company that made smart strategic moves amid the pandemic. Weiss thinks these changes enabled Airbus to gain a competitive upper hand on its US counterpart, Boeing. Airbus has a strong fleet of narrow-body aircraft options, including its highly regarded A321 and its smaller A220, acquired from Bombardier, Weiss says. He thinks Airbus could benefit from air traffic growth and the industry's high technological barriers to entry.

Weiss also sees opportunities for Safran (SAFRF), a France-based maker of aircraft engines and aerospace systems. The company focuses on lowering carbon emissions and alternative-fuel technology to help meet the challenges associated with climate change. He cites Safran's high-quality production standards, economies of scale, and exposure to increased traffic for narrow-body jets.

Increased air travel also could result in a shortage of pilots, which Weiss says could benefit CAE (CAE), a Canadian supplier of training simulation products and training solutions for civil aviation, defense, and health care markets. He argues the company built on its competitive position during the pandemic, acquiring a pilot-training equipment competitor and expanding its training service capabilities even as others deemphasized or exited the business.

"It may take more time for the aerospace industry to fully recover," puts Weiss, "but I'm optimistic about the opportunities I see and the values I've found in this segment."

On the seas

Unless you live on the West Coast, you may be unfamiliar with one of the major transportation consequences of the COVID-19 pandemic: a backlog of dozens of container ships waiting to be offloaded at the ports of Long Beach and Los Angeles.

As of late August, Los Angeles port data reports that the average wait for a berth space was 7.8 days, with 90% of ships arriving in the harbor anchoring. This wait likely has increased the cost of shipping, and thus, the cost of everything from household furniture to Peloton exercise bikes and laptops. Part of the reason for the delay is healthy demand, but also a dearth of empty shipping containers in China.

"Congestion hinders getting goods to market in a timely way, but the silver lining is that the chaos presents opportunities for companies that can help ease the logistics situation," says Matthew Moulis, manager of Fidelity® Select Transportation Portfolio (FSRFX). "I've invested in several companies for this reason."

One company Moulis thinks could help relieve the pressure on congested ocean-cargo routes is Air Transport Services Group (ATSG), the biggest air-cargo leasing company in the world. He boosted his fund's stake in this company in February, looking to the sky as the seas remain overcrowded.  The fund also invests in Atlas Air Worldwide Holdings (AAWW) which provides similar services and can also benefit from easing the strain on clogged ports.

He also mentions Hub Group (HUBG), an asset-light provider of a suite of services, including international transportation and other logistics services in North America. Moulis thinks Hub Group is well-positioned to step in and solve problems that might crop up virtually anywhere in a supply chain.

"You could be hearing more about freight rates in the future," Moulis says. "I believe many of these shipping challenges may continue for much of the year, which is partly why I think transportation fundamentals could remain solid," he says.

Finding ideas

Interested in investing in these transportation trends? You may want to consider mutual funds and ETFs. Fidelity® Select Automotive Portfolio (FSAVX), Fidelity® International Growth Fund (FIGFX), and Fidelity® Select Transportation Portfolio (FSRFX) held securities mentioned in this article as of their most recent holdings disclosure. For specific fund information, including holdings, click the fund trading symbols above.

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