Now that the United States FED has been applying pressure by raising interest rates and decreasing liquidity levels in the economy, investment dollars become more and more focused on healthy - and predictable - free cash flow alongside a healthy mix of growth. 

The sentiment in the transportation equipment industry says it all, as respondents expressed that they are "... continuing to ship to max capacity..." within last month's ISM manufacturing PMI report. This is a clear and vital outlier, considering that manufacturing readings have pointed to contraction for the past ten months.

Taking this dynamic as a foundational pillar, from where investors can build a solid portfolio around the industry, the homework has been done for them to pick and choose between these winning stocks for a winning sector, but more on that later...

Westinghouse Air Brake Technologies

Not only is this company the largest in market capitalization in the industry peer group, but it is also the most valued, which will become a critical metric in a second. Westinghouse Air Brake Technologies (NYSE: WAB) is drawing love from analysts for all the right reasons.

As the stock declined by as much as 11.4% during the past month, investors have an opportunity today to acquire a fast-growing business for a decent discount. According to Westinghouse's latest quarterly earnings press release, net revenues grew by 17.5% to kick off a fantastic quarter.

But wait, there's more: management raised the full-year 2023 guidance for an EPS jump of 16% over the year, where guidance previously reflected a 10% jump. Considering analysts are still only projecting an 11.2% jump in EPS, current price targets may be understated.

With a consensus upside of 16.3% from today's prices, investors could see this valuation gap jump to a reasonable 25% upside once analysts consider the higher EPS guidance from management. Luckily for investors, markets are one step ahead of analysts this time.

The industry trades at an average price-to-earnings ratio of 9.0x, while Westinghouse is valued at a 100% premium of 18.0x P/E. Some value investors may argue that this only makes the stock more expensive.

However, there is a reason why markets are willing to pay a premium price for the underlying earnings in this business, perhaps quality, growth, or a combination of both.

Understanding that this company enables the sustainability and growth of the global freight supply chain, a niche that has been clawing its way back to normalization, poses a significant tailwind for the continued financial expansion of Westinghouse.

Trinity Industries

When you hear about a business that grew its revenues by 73% over twelve months, you would expect the stock price to soar past previous highs, correct? Well, not exactly. Trinity Industries (NYSE: TRN) is the perfect example of a value gap discrepancy where markets are far from efficient.

This stock chart will reflect prices similar to those experienced a year ago before the company expanded as aggressively as it did. Bears could argue that revenue expansion is only a fraction of the ingredients needed to drive a stock higher, and they would be correct except for one thing.

EPS jumped by as much as 63%, as announced during the quarterly results press release, which would have been the ultimate reason to send this stock higher by roughly the same amount. 

Here is another head-scratcher: how come EPS grew by that much during the year, and analysts are projecting a further jump of 35% for next year, yet the consensus price target of $29 a share reflects a mere 17.8% upside from today's prices.

Remember that these two data points surrounding EPS amount to over 100% increase, yet the stock has gone nowhere. Markets are sure betting on the future being brighter than the past, which is why they are willing also to pay a premium for this name.

Trinity stock is valued at 14.2x P/E, above the industry average of 9.0x, a justifiable reason to 'overpay' for massive growth in the company's financials in hopes that the stock will eventually reflect this value creation.

Investors can wait around and find out how much money they left on the table or hop on the train before it goes.

Herc 

Here is another growth story that has yet to be priced into the stock price: Herc (NYSE: HRI) has grown its revenues to an all-time high of $802 million for the last quarter, representing an annual increase of 25%.

Yet again, this is one stock chart that will show roughly the same price as a year ago. This time around, however, analysts have chosen to be a bit more generous with their upside scenarios.

The current consensus price target for Herc lands at $151.8 a share, requiring the stock to rally by as much as 25.4%. Since EPS grew by 12% over the year and is projected to grow another 13.5% next year, rally fuel is found elsewhere.

Management has been caught repurchasing up to 520 thousand shares during the quarter, expressing their viewpoint that the stock is cheap today and expected to move higher from here.

So, there you have it; the stars have aligned on an individual stock basis and within the industry trends. There is no such thing as a risk-free investment, but the scale is tipped favorably for this one.