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Investing.com -- Goldman Sachs downgraded several rail stocks to Neutral in a note Monday, signaling a shift in its transportation sector outlook in favor of truckload and less-than-truckload (LTL) carriers, which it believes offer better risk-adjusted return potential as the freight cycle begins to turn.
Goldman analysts told investors they are “shifting our investment recommendations to favor the Trucking sector” and “now have a more neutral view on the rail sector and rail-adjacent sector (intermodal).”
As part of the shift, Norfolk Southern (NYSE:NSC), Union Pacific (NYSE:UNP), Canadian Pacific (NYSE:CP), CSX (NASDAQ:CSX), and J.B. Hunt were all downgraded to Neutral, while Canadian National remains rated Sell.
Goldman emphasized that its rail downgrades “are not idiosyncratic negative calls,” but rather a recognition that “rails are this year’s outperformers as they often sit at the defensive-end of the cyclical spectrum.”
Year to date, rail stocks are up about 2% and are “outperforming all transport subsectors as well as the S&P 500.”
As the freight cycle begins to recover, Goldman expects truckers to “play catch-up with more expected torque off the initial bottom.”
The firm sees “better relative share price performance” in trucking names as earnings per share recover sooner than in rail, especially in intermodal where rate recovery lags by one to two quarters.
While risks remain tied to tariffs and consumer demand, Goldman said it is looking to “increase exposure on the early side to names likely to benefit from the next EPS upgrade cycle.”