"The railroad sector is one of the few reliable groups in today's market; with solid pricing power, these companies have a solid future moving forward," says contrarian Chris Johnson.
"We are adding CSX Corp. (NYSE: CSX) as a long position to the Insightful Investor portfolio. Here's his look at the stock, and an options play for those seeking leverage.
"Last week, our Earnings Tip Sheet highlighted CSX as a bullish pick ahead of earnings. The stock was positioned for a jump according to our Behavioral Valuation approach. One week and a positive earnings report later, we're looking to increase our exposure to the company.
"CSX has now reported earnings results that handily beat both the analyst forecast and the whisper number. The company overcame softness in some sectors through increased shipments in ethanol and grain as well as increased foreign demand for coal.
"Rail companies appear strong moving forward, given that rising crude oil prices are forcing companies to use more cost-efficient means to ship their goods.
"What's more, CSX was the first of the 'big four' rail companies to report earnings. The company should thus benefit from positive reports when its competitors enter the earnings confessional.
"Technically, CSX has been a relative strength leader, having gained 40 percent so far in 2008. In fact, CSX owns one of the stronger price charts that we've seen outside of the hot agriculture and commodities sectors. The stock is trading well above its short- and intermediate-term moving averages, all of which are trending higher.
"Despite the strong price activity, sentiment toward CSX is tilted to the negative, as its put/call ratio has been trending higher. In fact, last week the ratio moved just above 1.0, indicating that put volume is now beginning to outweigh calls. This activity normally indicates pessimism.
"In addition to the recent option activity, the analyst community has been underweight the stock. As of last week, just two of 10 covering analysts rate the shares a 'buy.' That skepticism leaves plenty of room for upgrades, which should happen as the stock continues its uptrend.
"We view the pessimistic sentiment toward CSX as a positive, given that the technicals and fundamentals are clearly bullish. The stock should receive a boost in buying pressure as these skeptics realize the stock's strength and jump aboard, hoping to join the party before CSX leaves the station.
"In addition, for those who prefer to leverage the expected gain, we recommend purchasing the CSX August 60 call (CSX HL) which closed last Friday at $5.80."
Each day, Steven Halpern's TheStockAdvisors.com offers the latest market commentary and favorite investment ideas from the nation's leading financial newsletter advisors.
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