BloggingStocks recently ran a series of posts called "Stocks for a Volatile Market" in which I argued that shoe maker Steven Madden (NASDAQ: SHOO) was currently priced with much less worthy peers (lower margins, most notably) and loaded with free options and potential catalysts.
While I thought that many of my team's posts made great sense, I take great issue to Sheldon Liber's post on FreightCar America (NASDAQ: RAIL). I have no issues with Sheldon's long term investment record, investing philosophy, or most of his ideas, but I think that this post had several great problems.
Most importantly, Sheldon seemed to purposely neglect considering the future potential of this company by saying that he focuses "not forward projections and guessing, but real facts. It is way too hard to predict the future." But therein lies the entire problem, he neglected the fact that he was looking at an absolute cyclical peak in operations for the company!
He then cited the metrics for the stock (emphasis his): "The P/E is 5.51, the P/S is 0.49, IT HAS ZERO DEBT!, with an ROE and ROI of 87 and an ROA of 47 - that's incredible!"
ARII posts
FeedValuing FreightCar with peak earnings -- a recipe for disappointment
Continue reading Valuing FreightCar with peak earnings -- a recipe for disappointment
A different track to invest in rails
Warren Buffett's recently announced investments in railroads have caused many to consider this sector. But with stock prices for rail operators up sharply since the news, investors might want to consider another track to invest in the sector.
Indeed, one advisor who was already riding the rail sector is Elliott Gue, contributing editor to Personal Finance newsletter, who recommends a trio of companies that make and lease railcars.
First up is American Railcar Industries (NSDQ: ARII). Gue notes that deliveries of is railcars soared 32% in the final quarter of 2006, primarily by sales of ethanol tankers.
He adds, "In addition to ethanol demand, there's a strong replacement cycle underway in the tanker car business. Specifically, new government safety requirements are forcing shippers to upgrade and replace their older carriers with safer models."
American Railcar Industries: Legislation will keep this train on track
I am always keeping an eye on what is happening on Capitol Hill. In 2002, the Farm Security and Rural Investment Act was passed to provide a boost to many different companies with interests in agriculture. This bill is due to expire this September, but analysts on the Hill predict that the renewed legislation will likely resemble the current farm bill. This is good news for biofuel interests, fertilizer producers, and farm equipment providers (like Archer Daniels Midland Co. (NYSE: ADM)). The agriculture bill will also give a boost to manufacturers of rail car and rail equipment, whose products are needed to carry the agricultural products. For this reason, I think it might be a good time to pick up American Railcar Industries (NASDAQ: ARII).
American Railcar is easily considered one of the leading manufacturers of covered hopper and tank rail cars in the United States. The company also repairs and refurbishes rail cars and provides fleet management services for businesses using rail transportation. In addition to carrying grains and dry foods in its covered hopper rail cars, the tank rail cars transport the liquid products such as vegetable oil, corn syrup, and ethanol.
The 2007 Farm Bill is likely to bring big gains in particular to agriculture-based renewable fuels, like bioethanol -- which in turn will bring gains to the carriers of such commodities. Further, American Railcar is relatively undervalued versus its competitors. The P/E is 16 compared to the industry average of 27.3. In short, I like this company now -- and into the future.
Type of stock: A cyclical stock in the industrial materials sector, ARII makes and repairs rail cars.
Price target: I think that the upcoming farm legislation will likely help push this stock back to its 52-week high of
$41. Currently, ARII is hovering at $30.
Hilary Kramer is a financial editor and money coach for AOL and an authority on investing. Visit her at www.hilarykramer.com.
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