The third-quarter 2016 earnings season is in its last leg for most of the 16 Zacks sectors, with only a few companies left to unveil their quarterly financial numbers.  Per our latest Earnings Preview report, 445 S&P 500 companies (representing 91.1% in terms of market capitalization) have already reported their numbers.

The picture is an extremely bullish one with the bottom line expanding 4% and the top line displaying 2.7% growth. The healthy performance indicates that the current earnings season is set to become the first quarter to display bottom-line expansion after five consecutive quarters of earnings contraction.

Transports Continue to Lag

Despite the overall favorable scenario, the transportation sector remains one of the most underperforming sectors. The sector has already seen reports from its entire S&P 500 fraternity this reporting cycle. The above report states that the bottom-line contracted 13.6% on a year-over-year basis for the sector. The earnings performance is worse than that witnessed in the second quarter, wherein the bottom line contracted 12.4%.
However, the outcome is not surprising as the sector has been passing through turbulent times. The multiple headwinds confronting stocks in the space include declining travel demand due to security fears, weak coal market, driver shortages and Brexit-induced uncertainty. Collectively, these negatives resulted in the disappointing year-over-year earnings performance.

The unfavorable Zacks Industry Ranks of most of the sub-groups of the transportation industry also reflect the challenges faced by the space. We note that the Transportation-Airline, Transportation-Truck, Transportation-Services and the Transportation-Ship units carry a bearish Zacks Industry Rank of 184, 247, 206 and 178, respectively, among more than 260 groups.

Glimmer of Hope

Despite the multiple challenges confronting sector participants, quite a few players in the transportation space have outperformed on the bottom-line front. Per the above report, an impressive 66.7% of the S&P 500 transportation companies have reported better-than-expected earnings in the current reporting cycle. Key sector participants to have reported better-than-expected earnings in the quarter include the likes of Delta Air Lines (DAL), United Parcel Service, Inc. (UPS) and Norfolk Southern Corp. (NSC).

However, we note that earnings estimates have been declining for most of the sector participants due to the multiple headwinds. Consequently, it was easier for transports to surpass the Zacks Consensus Estimate on the earnings front in the third quarter as the “bar was lowered” significantly.

Shipping Stocks in Trouble

With the broader transportation sector in doldrums, it is unlikely for any sub-group to outperform. Shipping stocks, which form an integral part of the sector, have been hurt by headwinds like low freight rates and weak financial position.

The waning impact of cheap oil is also not favorable for transportation companies and shipping stocks are no exception. The tough times are evidenced by the fact that we currently have only one shipping stock – KNOT Offshore Partners LP (KNOP) – sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The upsurge (2016 Zacks Consensus Estimate has climbed 14 cents over the last seven days) followed the company’s bottom-line outperformance in the third quarter of 2016. The company delivered a positive earnings surprise of 15.56% on Nov 2.

Some Outperformers Still Left

While most transportation companies (including the entire S&P 500 fraternity) have already reported their quarterly numbers, there are a handful companies that are yet to report third-quarter financials. However, the transportation sector is highly diversified and includes airline companies, truckers and railroads to name a few. Hence, it is by no means an easy task to pinpoint potential outperformers. This is where our proprietary methodology comes in handy. It advises investors to look for stocks that have the combination of a favorable Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP.

Earnings ESP is our proprietary methodology for identifying stocks that have high chances of surprising in their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.
  
Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

 An earnings beat more often than not boosts investor confidence in the stocks, which translates into rapid price appreciation. Consequently, adding such stocks to your portfolio is undoubtedly prudent.

2 Attractive Shipping Stocks

With the aid of the above methodology, we present two shipping stocks that are expected to outshine earnings estimates in the third quarter.
Navios Maritime Holdings Inc. (NM - Free Report) operates as a seaborne shipping and logistics company which focuses on transportation and shipment of dry bulk commodities including iron ore, coal, and grains. The company will likely release third-quarter results on Nov 28. We expect Navios Maritime to surpass expectations as it has an Earnings ESP of +16.00% and a Zacks Rank #2.

Golden Ocean Group Limited (GOGL - Free Report) , based in Hamilton, Bermuda, focuses on the transportation of bulk commodities. The company is scheduled to release third-quarter results on Nov 22. We expect Golden Ocean Group Limited to surpass expectations as it has an Earnings ESP of +28.13% and a Zacks Rank #3.