These Stocks Could Chug Higher Into November

UNP stock could be flashing buy before earnings, and the NSC rally might have legs

by Andrea Kramer

Published on Oct 24, 2018 at 10:45 AM

The shares of Norfolk Southern Corp. (NYSE:NSC) are higher in early trading, as traders applaud the company's quarterly earnings report. What's more, the stock's rally could have legs, if recent history is any indicator. In addition, fellow railroad stock Union Pacific Corporation (NYSE:UNP) could be flashing buy before the company reports earnings tomorrow. Below, we'll take a closer look at NSC and UNP shares, and explain why transportation stocks in general could enjoy a warm November.

Norfolk's Earnings Rally Could Have Legs

NSC was last seen 4.3% higher to trade at $163.76. After touching an all-time high of $186.91 in mid-September, the security pulled back with the broader equities market, but found support atop its 200-day moving average. In fact, the security yesterday came within one standard deviation of this trendline after a lengthy stretch above it -- sending up what's been a historically bullish signal.

Specifically, in the past three years, there have been six similar pullbacks to the 200-day for Norfolk Southern shares. After these dips, the stock was higher one month later 100% of the time, averaging a healthy gain of 7.64%, per data from Schaeffer's Senior Quantitative Analyst Rocky White. If past is prologue, today's post-earnings boost could just be getting started for NSC.

NSC stock chart oct 24

A short squeeze could add fuel to the stock's fire, too. Short interest has been declining recently, but still represents more than four sessions' worth of pent-up buying demand, at NSC's average pace of trading.

UNP Could Be a Buy Before Earnings

Union Pacific is slated to report its own third-quarter earnings before the open tomorrow, Oct. 25. The shares also enjoyed a record high in mid-September, peaking at $165.63 before pulling back to their 200-day moving average. There have been three of these signals in as many years, after which UNP stock went on to average a one-month gain of 7.59%, and was up 67% of the time. From the equity's current perch of $144.66, a similar rally would place it just under $156.

UNP stock chart oct 24

Should the company wow with its earnings report tomorrow, there's plenty of room on the bullish bandwagon. More than half the analysts covering UNP maintain tepid "hold" or "strong sell" ratings, and put buying has ramped up lately. On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.53 is in the 84th percentile of its annual range, pointing to a healthier-than-usual appetite for bearish bets over bullish of late.

Best Sector for November

In addition, seasonality is on the side of transportation stocks. Over the past decade, the iShares Transportation Average ETF (IYT)  -- which boasts NSC and UNP among its top three holdings -- has been the best exchange-traded fund (ETF) to own in the month of November, per White. Specifically, the fund has been higher 80% of the time, averaging a gain of 3.11%.

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