This Stock Is Already Up 40% This Year, And an Emerging Tailwind Could Push It Even Higher

Tech investors are still licking their wounds as the bloodbath in the software sector continues, but if you look elsewhere in the stock market, there have been some surprising winners this year.

One of them is XPO (NYSE: XPO), a leading less-than-truckload (LTL) carrier in North America and Europe. XPO is up a remarkable 39% year-to-date, and nearly all of those gains have come just this week as the company jumped on a strong manufacturing report from the Institute of Supply Management (ISM) and as sector leader Old Dominion Freight Lines expressed optimism for 2026.

XPO backed up those gains with its own strong results in the fourth quarter on Thursday. Revenue rose 5% to $2.01 billion, topping estimates at $1.95 billion, driven by a 5.2% increase in yield, or price, even as tonnage per day declined 4.5%, in line with ongoing weakness in the industrial sector.

The company delivered its strongest results yet across key service metrics, such as damage ratio and on-time delivery rate, enabling it to raise prices. It's also significantly reduced its outsourced linehaul miles, and those initiatives have improved the company's margins. Adjusted operating ratio in North America, its primary market, improved 180 basis points to 84.4%, equal to an operating margin of 15.6%.

Adjusted for gains in real estate sales, earnings per share increased from $0.68 to $0.80, ahead of the consensus at $0.76. Following its surge earlier in the week, XPO stock was up 4% in trading on Thursday afternoon.

Image source: XPO.

Can XPO keep climbing?

What kicked off the rally in the stock earlier this week, sending XPO shares up 10% on Monday, was a report from the ISM showing that manufacturing activity expanded in the U.S. in January for the first time in more than two years with a reading of 52.6%.

XPO's business and the LTL industry as a whole are highly correlated with manufacturing activity, as roughly two-thirds of XPO's shipments are for industrial goods. The company has managed to deliver solid results in recent quarters even as volume has declined, but a manufacturing expansion would likely lead to rising volumes and could drive XPO's revenue and profits significantly higher.

In an interview with The Motley Fool, XPO Chief Strategy Officer Ali Faghri said the company estimates volumes are down 15%-17% from what they would be in a healthy industrial economy, which would provide a huge lever if that demand normalized. Additionally, the industry has lost capacity since the bankruptcy of Yellow, which could further boost prices in a manufacturing recovery.

The company may already be seeing signs that demand is improving, as volume was flat in January, even with an estimated 3 percentage-point hit from the winter storms in the eastern half of the country.

Faghri said the company could be "off to the races" if the economy bounces back, as it has invested significantly in recent years, adding 25 service centers, 19,000 trailers, and 6,000 tractors since 2022.

The long-term picture

Looking at the headline numbers, XPO stock looks expensive, trading at a price-to-earnings ratio around 50, so some of those recovery tailwinds seem to be baked into the stock.

Still, the company expects to improve free cash flow even without a macroeconomic tailwind as it is moving past an earlier investment cycle, which Faghri said would leave more cash available to return to shareholders. XPO is also expanding into new premium services like grocery consolidation, in addition to local services and serving small and medium-sized businesses.

Overall, XPO has executed well in a difficult environment, driving operational improvements and expanding margins. If the manufacturing sector recovers, the stock has the potential to move significantly higher.

Jeremy Bowman has positions in XPO. The Motley Fool has positions in and recommends Old Dominion Freight Line. The Motley Fool recommends XPO. The Motley Fool has a disclosure policy.