Freight Stocks Have a Tariff Overhang. Morgan Stanley Says It Could Be Worse.

A Canadian National Railway Co. truck. (Cole Burston/Bloomberg)

Train and truck stocks got washed out with the April 2 tariffs announced by President Donald Trump. The levies were paused for 90 days of negotiations with foreign governments. That pause was set to end Wednesday, but on Monday afternoon the administration extended it to August 1. Investors betting on a recovery in the freight sector will then face another day of reckoning.

“We remain subject to extreme headline risk,” writes Morgan Stanley’s freight transport analyst Ravi Shanker in a Monday note. He wonders if the stocks will fall off another cliff when the tariff pause ends.

The S&P 500 has been setting records, but freight stocks are down around 10% this year. Transportation stocks have been out of favor for a while, as rail freight volumes flattened and truckers suffered through their own private recession.

With the freight haulers readying June-quarter reports, the best that Shanker can say is that the period was probably not as bad as investors think. Intermodal container shipments sank as expected, after Trump’s April tariffs, but other freight volumes held up.

The back half of May and the month of June were seasonally strong for the haulers, he notes. Freight volumes have long been a favorite economic indicator for investors such as Warren Buffett, and Shanker says the sector’s numbers suggest that the economy won’t sink into a recession in this year’s second half.

Still, he is pessimistic that June-quarter results will draw investors back into transport stocks. His price targets are below the current stock prices of railroaders Norfolk Southern, CSX, Union Pacific, and Canadian Pacific Kansas City. He does see about 35% upside for Canadian National Railway stock, because that company’s miserable 2024 results make this year an easy comparison.

The Morgan Stanley analyst is relatively optimistic on trucking stocks, betting that some of these long-unloved companies will manage to exceed investors’ rock-bottom expectations. Shanker’s price targets are some 50% higher than today’s stock prices for Werner Enterprises, Schneider National, Knight-Swift Transportation Holdings, TFI International, and ArcBest. He also likes the logistics firms RXO and GXO.

Just one trucking company has remained popular on Wall Street, namely XPO. Shanker thinks the stock is now overpriced.

Ownership of rail and truck stocks is at a historic low. If June’s earnings calls have an upbeat tone, and tariffs end up not hurting foreign trade, Shanker remains hopeful that investors could be coaxed back into the cabs.

Write to Bill Alpert at william.alpert@barrons.com