In 2017, U.S. transportation stocks should be boosted by stronger GDP growth and a reduction in the corporate tax, Deutsche Bank believes. The firm thinks that the U.S. transportation sector will be in the "early innings" of an upcycle" next year, identifying Union Pacific (UNP), XPO Logistics (XPO), Swift Transport (SWFT) and Old Dominion (ODFL) as its top picks in the sector for 2017.

POSITIVE CATALYSTS: U.S. real GDP growth should rise to 3% in 2017, said Deutsche analyst Amit Mehrotra. Before the election, the firm had estimated that real GDP would increase just 1.8% next year. Given that there is an over 80% correlation between freight flows and U.S. economic growth, U.S. transportation companies will be well-positioned to benefit from next year's GDP acceleration, the analyst stated. Meanwhile, a reduction in the corporate tax to 20% would increase the sector's earnings power by 26% while potentially raising its cash flow and book value, Mehrotra stated. Transportation stocks are currently pricing in either the acceleration in GDP growth or a corporate tax cut but not both, the analyst contended.

TOP PICKS: Union Pacific is one of the best positioned stocks in the sector, given its high exposure to U.S. GDP growth, capex reductions that should boost its free cash flow, "and its cash return dynamics," Mehrotra believes. The analyst raised his price target on the shares to $123 from $110. The volume and earnings of XPO Logistics' less-than-load, or LTL, business can grow significantly, and the cost synergies it has targeted are achievable, the analyst stated. The company's free cash flow should "more than double by 2018," and the stock should be boosted by short covering, Mehrotra stated. Swift Transportation should be helped by the "tightening" of U.S. trucking supplies that should occur in the second half of 2017, the analyst stated. Meanwhile, the company has reduced its debt and is starting to return cash to shareholders, leaving the shares well-positioned to jump significantly, Mehrotra wrote. Old Dominion's LTL business should benefit as truckload capacity tightens, the analyst stated. Moreover, the high fixed costs of the LTL business enable its profit growth to exceed its revenue increases by a significant amount, the analyst stated. He raised his price target on the name to $108 from $90.

PRICE ACTION: In late morning trading, Union Pacific lost 0.1% to $103.94, XPO added 0.6% to $47.92, Swift Transportation gained 0.8% to $24.28, and Old Dominion was up 0.1% at $87.95.