Hot Picks in Transportation and Logistics: Baird's Strategic Bets for a Turnaround in 2025

The transportation and logistics sector has been navigating choppy waters for years, but 2025 could mark a turning point. A confluence of tightening capacity, inventory drawdowns, and favorable policy shifts is creating a catalyst-rich environment for select companies to thrive. Among them, Hub Group (HUBG) and Knight-Swift Transportation (KNX) stand out as Baird's top picks, positioned to capitalize on an industry rebound. Let's dissect the opportunities and risks.

The Catalysts Driving a Turnaround

1. Capacity Tightening: A Freight Rate Floor is Forming

Baird analysts highlight that capacity constraints are finally creating leverage for carriers. Over the past year, trucking rates—which had been pressured by economic headwinds—have stabilized, signaling a potential bottoming out. This “floor” effect is critical because it suggests carriers can finally command higher prices as oversupply eases.

2. Inventory Drawdowns: Restocking Will Fuel Demand

Companies across industries are aggressively reducing excess inventory built up during the pandemic. This process, as noted by Baird, is a classic precursor to restocking cycles. As inventories normalize, freight volumes should rebound, benefiting both truckload and intermodal players like HUBG and KNX.

3. Policy Shifts: Fiscal and Monetary Tailwinds

• Monetary Policy: A dovish Fed (expected to replace Powell in 2026) could cut rates, easing borrowing costs and stimulating economic activity.
• Fiscal Policy: The “One, Big, Beautiful, Bill Act” (likely bipartisan infrastructure spending) is poised to boost demand for logistics services through public projects.

Hub Group (HUBG): A 3PL Leader with Conservative Leverage

Hub Group, a third-party logistics (3PL) firm, offers a diversified portfolio of services, including dedicated trucking, asset management, and intermodal transport. Its Q1 2025 results show resilience:
- Revenue: $915M (-8.5% YoY, but $48M above consensus).
- Earnings: 44¢ EPS (beat estimates by 1¢).
- Balance Sheet: $141M in cash, with net debt/EBITDA at a conservative 0.8x, enabling flexibility during cycles.

Baird's Take: Analyst Daniel Moore rates HUBG Outperform, with a $44 price target (25.5% upside). The Street's average target is $40 (14% upside). Key drivers:
- CEO Phil Yeager's focus on margin expansion.
- Strong free cash flow projections ($300M in 2025).

Knight-Swift Transportation (KNX): Operational Excellence in a Recovery

Knight-Swift, a leader in full-truckload (FTL) and less-than-truckload (LTL) shipping, reported solid Q1 results despite headwinds like extreme weather:
- Revenue: $1.82B (flat YoY, but $26M above forecasts).
- Earnings: 28¢ EPS (4¢ beat).
- Sector Growth: LTL revenue surged 26% YoY, outpacing the industry.

Baird's Take: KNX is rated Outperform, with a $55 price target (16.5% upside). The Street's average target is $51.93 (10% upside). Key advantages:
- Diversified fleet (19,000 tractors, 58,000 trailers).
- Potential for peak earnings ($6/share vs. current levels).

Risks and Considerations

While the outlook is optimistic, risks remain:
- Economic Uncertainty: A prolonged slowdown could delay the inventory-driven recovery.
- Policy Delays: Infrastructure bills or Fed rate cuts might not materialize as expected.
- Weather and Tariffs: Short-term volatility from extreme weather (e.g., 2025 Q1) and trade disputes could pressure margins.

Investment Thesis: Buy the Dip, Hold for the Cycle

Both HUBG and KNX are well-positioned to benefit from the capacity-constrained, restocking-fueled recovery. Their financial discipline (low leverage, strong cash flows) and operational flexibility give them an edge over peers.

• Near-Term: Focus on freight rate stabilization and inventory trends.
• Long-Term: Play the secular shift toward nearshoring and infrastructure spending.

Recommendation:
- HUBG: Accumulate below $40 (current price ~$35).
- KNX: Buy dips below $47 (current price ~$47).

Both stocks offer asymmetric upside if the Fed's dovish pivot and inventory recovery materialize.

Final Note: The logistics sector's recovery hinges on demand and policy execution, but these two names are among the safest bets to navigate 2025's challenges—and capitalize on the rebound.