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As wider audience discovers U.S. railroads, perhaps you should, too

Posted Apr 21st 2008 5:44PM by Joseph Lazzaro
Filed under: Stocks to Buy, Burlington Northern Santa Fe (BNI), Norfolk Southern Corp. (NSC), Union Pacific Corporation (UNP)

When a major, metropolitan U.S. newspaper discovers a investment trend or a hot sector, count on increased share demand for companies in the sector. When that paper is one of the top three dailies, in this case The Washington Post, count on even more demand.

On Monday, The Washington Post examined the resurgence of the United States' railroad sector, touching on many of the themes discussed here during the past six months, and described why the rails' services are likely to be in demand for many years.




Is it too late to get in on a rail play? Hardly. P/Es are higher, so entry point is key, hence with the above in mind, here's a revised review of the rails, with the updated Sell / Stop Loss levels. They're ranked by risk, with the top stock, BNI, being the lowest risk.

Burlington Northern (NYSE: BNI), first reviewed at $89, p/e 17. Stop Loss: $56. Current Price: $99, p/e 20. Revised Stop Loss: $72.

Union Pacific (NYSE: UNP), first reviewed at $129, p/e of 19. Stop Loss: $84. Current Price: $137, p/e 20. Revised Stop Loss: $97.

Norfolk Southern (NYSE: NSC), first reviewed at $52, p/e 14. Stop Loss: $33. Current Price: $61, p/e 17. Revised Stop Loss: $42.

CSX Corp. (NYSE: CSX), first reviewed at $42, p/e 16. Stop Loss: $27. Current Price: $60, p/e 20. Revised Stop Loss: $42.

Canadian Pacific (NYSE: CP), first reviewed at $66, p/e 14. Stop Loss: $44. Current Price: $71, p/e 12. Revised Stop Loss: $48.

Railroad stocks were out of favor on Wall Street for the longest time. After World War II, auto travel spelled the decline of civilian rail transport, and in the 1960s truck transport displaced trains as the primary freight transport method.

The rails were about set to fade into oblivion when history finally started to swing in the rails' favor. In the 1990s, the Cold War ended, and globalization started. Emerging markets became new buyers of commodities and raw materials, and railroads added new international customers. Meanwhile, the price of oil began its decade-long march higher in 2001, to the record level of $117 per barrel this year, making container transport by rail cheaper in most instances than truck transport. And suddenly, the rails had new domestic customers for finished goods, to go along with its commodity transport business.

The risks: This is not to say owning a railroad stock does not involved risks. The rails remain vulnerable to a sustained downturn in the U.S. and/or global economies, and also vulnerable to the development of a cheap, widely-available, alternate fuel source for trucks.

But absent the above, the prospects look good for the rails, long-term. Even better, urban highway congestion projections suggest that rails will play a large role in inter-city goods transport: it's hard for trucks to get goods to their destination quickly when the highways are jammed.

Or, as the late, great comedian Alan King used to say, "Why do they call it rush hour on the highways when nothing moves?"

Disclosure: Lazzaro has no positions in stocks. In addition to private real estate holdings, he owns corporate and municipal bonds, and cash certificates of deposit.

Tags: BNI, Burlington Northern, Canadian Pacific, commodities, CP, CSX, CSX Corp., exports, imports, inthenews, Norfolk Southern, NSC, railroad sector, railroads, trade, Union Pacific, UNP

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