Driving Up the Wall of Worry: Why Trucking Stocks KNX, JBHT, & WERN are the Market's Best-Kept Secret

Are you one of the many investors who have refused to invest in - or stay invested in - trucking names like Knight Transportation (NYSE:KNX), J.B. Hunt Transport Services, Inc. (NASDAQ:JBHT), and Werner Enterprises, Inc. (NASDAQ:WERN)? It's not hard got understand why, if that's the case. The economy is struggling, freight demand is down, and with the construction market still crimped, stocks like WERN, KNX, and JBHT just don't have a prayer, right?

Only problem is, those conclusions are (mostly) wrong. Traders who have assumed the worst for the trucking industry may want to take a closer look.

To be clear, demand for most aspects of the shipping business aren't back to pre-recession peaks. And in some cases, neither are profits for trucking companies. On the other hand, you invest in stocks based in where they're going and not for where they are, and where Knight Transportation, Werner Enterprises, J.B. Hunt Transport Services, and a (sorry, had to do it) truckload of other lower profile road shipping names are currently going is compelling.

J.B. Hunt Transport Services' per-share earnings of $2.11 was a record breaker for the company, and represents the second straight year of profit growth following the recession. Werner Enterprises broke a record too, with last year's profit of $1.40 per share. Knight Transportation's per share bottom line of $0.74 in 2011 wasn't a record, but it - like J.B. Hunt and Werner Enterprises - is expected to reach record profit levels in 2012. In all three cases, however, their stocks have been poor performers for at least a year.

It raises two key questions for investors: (1) Why? (2) Will the growth continue?

As for the 'why', part of the reason the industry's bigger names seem to be doing better is that many of the industry's small names are no longer in business, leaving players like J.B. Hunt and Werner with bigger pieces of the same-sized pie. The other part, however, is the part investors want to see... overall demand is improving.

It's a message the perma-grumblers will argue, though the data supports the 'improvement' theory. The American Trucking Association's Total Tonnage Index (the amount of shipped goods) reached record levels in January of this year. While it's fallen back in the meantime, ebbs and flows are not unusual for it. In the bigger picture, the trend is still pointed upward.

And, though not back to pre-crisis levels, the total number of truckloads put on the road is still broadly rising too.

Given that about 66% of the nation's freight needs are met by trucks, this sustained trend of both measures does suggest that total shipping demands are on the rise.

As for whether or not the earnings growth trend is sustainable, without a crystal ball, nobody can say for sure, but the trucking industry does have a clear catalyst straight ahead - housing.

Again, the naysayers will argue that it's not happening, but charts and numbers don't lie. Though still miles away from pre-recession levels, new construction is on the mend. It's been getting better since 2009's lull. Oh, it's been tepid, but the progress is measurable, especially when you're talking about multi-family housing.

But when does this really start to make an impact for picks like JBHT, WERN, and KNX? Soon, if it hasn't already. The key level to be hoping for is new housing starts sustained in the 750K (annualized) area. They were at 708K as of last month, but still rising.

There are other ancillary signs that trucking demand is improving, like the fact that Holland is looking to hire more than 499 drives thanks to growing demand, and that Con-Way is comfortable enough with the market's dynamics to raise its freight rates.

Though little of it has helped shares of Werner Enterprises, Knight Transportation, and J.B. Hunt Transport Services, investors can be patient... the time is coming. Indeed, the fact that these stocks have been so stagnant for so long means that once the time comes, it could be an explosive move.