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The transportation group as a whole, and rail and airline stocks in particular, have performed well on Wall Street so far in 2007, according to a transportation and logistics report recently released by the Wall Street Transcript.

“While the economy has slowed, businesses have been more aggressive at reducing inventories, and that has had a negative impact on freight volumes year to date,” the report states. “[But] things have picked up somewhat of late and the outlook is brighter for the rest of the year.”

Rail, barge, airfreight and logistics companies have the best stock growth opportunities, according to BB&T Capital Markets analyst John Barnes, who’s quoted in the report.

“There seems to be more and more business being directed to the rails, and as they have improved service levels, that should continue,” he said. “They have some opportunities on things like coal and additional intermodal business to offset some of their housing-related goods. Coal really isn't impacted by the economy [because] people are still going to turn their lights on and heat their houses. So, the rails and barge companies have an advantage there.”

In the report, Barnes identifies Norfolk Southern Corp. and Union Pacific Corp. as his favorite rail stocks.

NS has “industry-leading growth rates, very disciplined capital allocation plans, a very conservative management team and a very attractive entry point,” he said. However, the Class I needs to prove to investors that it can continue to improve the profitability and hasn’t maxed-out its margin improvement opportunities, said Barnes.

“Investors are beginning to look at Norfolk Southern and say, ‘It has an industry-leading margin for the US rails. Can there be much more?'” he said. “All they need to do is prove that there are two, three or four percentage points of margin improvement opportunity out there, and the stock should continue to work just fine.”

Meanwhile, UP has been delivering earnings in excess of expectations for several quarters in a row.

“I don't see anything on the horizon that will prevent them from doing more of the same,” said Barnes.

The Wall Street Transcript provides commentary and insight services to investors and industry researchers. To compile reports, the company interviews chief executive officers and research analysts.