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FedEx Looks Strong – Buy This Stock Instead

“We’ve probably seen the worst.”

That’s a direct quote from FedEx CEO Fred Smith back on March 19, right as the market was bottoming. Investors who followed his lead caught a double in the stock, and a 39% jump in the S&P 500.

Well, Smith made another bold prediction on Monday, saying that his company would beat the Street’s earnings expectations for the fiscal second quarter – 85 cents – by 25 cents. Why is that important? Because FedEx is one of the best gauges of worldwide commerce.

“When it says things are going to be much better than expected,” Cramer said, “I think you’d better listen.”

The transports as a whole – including FedEx, rails like CSX and Norfolk Southern and airlines like JetBlue and Continental – function as an early tell for the broader market. And right now both their charts and their fundamentals indicate that stocks in general have plenty of room left to run.

While the transports typically move in lockstep with the overall market, they will diverge at key points. This is most apparent, Cramer pointed out, when stocks reach a top. In these cases, the transports act as a leading indicator, dipping lower before other sectors. Such as the case in 1998 and 1999, with the Dow Jones Transportation Average pulling back a few months before the S&P.

Bottoms can be different, though. Rather than presaging the turn up, the transports hit a floor simultaneously with the market back in March. But – they vastly outperformed the S&P over the following two months, climbing 59% versus 36%, respectively. The transports didn’t forecast the trend, but they did confirm it, which is why Cramer recommended using the sector to validate a move.

“When you don’t know where you are, but you think you’re going higher,” Cramer said, “the transports tell you if you are on the right track.”

So with the market and the transports are in sync, predicting good things to come, how do investors play it? Buy UPS , Cramer said.

While FDX is up 40% year-to-date, UPS is up just 5%. And Cramer thinks it is only a matter of time before the latter firm closes the gap. Plus, UPS offers a healthy 3.1% dividend yield, a sizable increase over FedEx’s 0.5%.

Cramer also likes UPS for its more efficient cost structure, which will allow the company to take better advantage of the recovery than its main competitor. This is also the reason UPS historically has traded at a premium to FedEx, even though it’s now trading a discount to FDX. Cramer said he doubts that will last long.

“The transports, they hugely matter,” Cramer said. “The one to take a look at is UPS.”

Cramer’s charitable trust owns UPS.

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