In a challenging market amid an uncertain U.S. economic landscape, identifying long-term, promising investment opportunities becomes a difficult task. Further, to make the investment equation even more challenging, there's election risk, as well, with the 2008 U.S. Presidential election five months away.
Still, risk-adjusted investment opportunities exist. Accordingly, here's a 'Fab Five' that should rank with the best the equity markets have to offer, 3-5 years out.
(Note: Don't buy these stocks if you're interested in a short-term trade of six months or less. These are longer-term investments where the goal is a double-digit, average, annual, total return on equity over 3-5 years.)
Potash (NYSE: POT). Current Price: $212, p/e 47. Revised Stop Loss: $170. Potash remains the best of a very good fertilizer bunch, due to its 20% global market share in the namesake fertilizer. Consider buying POT on a pull-back to $202-203, but keep in mind Potash may not retreat to that level.
Mosaic (NYSE: MOS). Current Price: $132, p/e 40. Revised Stop Loss: $97. Mosaic also is well-positioned in phosphate and crop nutrients. Further, the fact that 66% of its revenue is internationally based is especially appealing, given the U.S. economic slowdown.
Transocean (NYSE: RIG). Current Price: $144, p/e 10. Revised Stop Loss: $110. RIG offers deepwater oil drilling services in all regions of the world, and it's an oil-thirsty world.
Freeport-McMoRan (NYSE: FCX). Current Price: $114, p/e 14. Revised Stop Loss: $69. Copper / gold / molybdenum miner Freeport is one of a handful of companies that have the economies of scale to compete in the global mining sector of the early 21st century, and it boasts impressive clients, to boot. Consider buying FCX on a pull-back to $111-113, but keep in mind Freeport may not retreat to that level.
CSX Corp. (NYSE: CSX). Current Price: $66, p/e 23. Revised Stop Loss: $48. Ride the railroad resurgence with this superior trade / commodity / freight transport company. The rails are in the transportation sweet spot: truck transport costs are rising with fuel costs, and the U.S. highway system is inadequate, with increased congestion likely, pending future investment.
Top Pick: Potash.
Safest Pick: CSX Corp.
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.
Readers of this space know that one of the preferred sectors is the railroad sector. The once near-rust-belt level sector has experienced a revival at the start of the globalization age, and compelling economic trends document the commerce-based underpinnings of this revival.
Most transportation officials agree that the U.S. transportation infrastructure -- highways, roads, bridges, mass transit systems -- is in need of a major upgrade in order to meet the nation's vehicle transportation needs of the 21st century.
The nation's public officials will begin to address the above concern in the years ahead, as public funds become available, but until they do, and due to crude oil's sustained high price, an opportunity has emerged for another transportation form: you guessed it, the railroads. And Norfolk Southern (NYSE: NSC) is a railroad worth an evaluation.
Norfolk Southern provides rail transportation in the eastern United States, operating a 21,000-mile rail network in the eastern United States and Canada. It's an elaborate intermodal and coal service network that also has a large freight business.
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.
As Congressional Democrats and Bush Administration officials evaluate additional legislative ideas aimed at further stimulating the anemic U.S. economy, one proposal that could gain more traction in the months ahead concerns domestic infrastructure.
The consensus among economists is that the first economic stimulus package will provide only a modest boost (at best) to the U.S. economy, economist David H. Wang told BloggingStocks Tuesday. Further, if many Americans choose to save or invest their $300-$1200 tax rebate, instead of spending it or using it to pay down debt, the stimulus effect will be even less than projected.
That would leave the U.S. economy with a correcting housing sector, record-high oil prices (oil topped $113 per barrel Wednesday), a contracting job sector, an investment banking sector largely seeking to rebuild balance sheets and not lend money, and rising living costs weighing on consumer spending. In other words, Wang said, all of the classic U.S. growth engines, except exports, are likely to serve as contractionary forces through at least the first half of 2008, and most likely for considerably longer.
For nearly 30 years, the rails, long neglected in the United States, were considered passé. Then the globalization era dawned, with its exports and demand for commodities. Add a price of oil that's basically risen for 10 years and the results is: the rails are back. And with the above in mind, Burlington Northern (NYSE: BNI) is worth an evaluation.
With 32,000 miles of track in the western U.S. and two Canadian provinces, Burlington Northern accounts for about 45% of the west's traffic and about 23% of U.S. rail traffic.
Analysts see 2008 revenue growth of about 6-8%, down from double-digit growth a year earlier, but still healthy. Margins should remain solid, with modest pricing power. The Reuters F2008/F2009 EPS consensus estimates for BNI are $5.92/$6.81.
Even better: like the three other major U.S. railroads, BNI is in a relative sweet spot until the United States determines its energy policy for the 21st century. Or should one say 'if the United States determines its energy policy for the 21st century.' Investors will carefully note that the value Wall Street attaches to rail stocks pretty much mirrors the price of oil's ascent, due to the higher truck transportation costs implied by a higher price of oil.
Readers of this space know that the railroad sector is one of the preferred sectors. After decades of unconscionable neglect, U.S. railroads are experiencing a resurgence, propelled by international trade and the rail's cost advantage over truck transport. But as one knows, trains don't always roll, sometimes they have to brake to stop, and that's where Westinghouse Air Brake Technology makes its money.
Westinghouse Air Brake Technologies (NYSE: WAB), known as Wabtec, manufactures braking equipment and other parts for locomotives, freight cars, and passenger rail cars.
Products of Wabtec's freight group include air brake systems, draft gears, hand brakes, slack adjusters, heat exchanges, railroad electronics, and monitoring and control equipment. The company also builds new locomotives up to 4,000 horsepower and provides aftermarket services, including locomotive and freight car fleet maintenance.
Analysts expect strong, double-digit revenue growth on solid back-orders and new business. Analysts also like Wabtec's blue-chip clientele, decent pricing power, demonstrated ability to deliver products and services on time, and reasonable cost structure. The Reuters F2008/F2009 EPS consensus estimates for WAB are $2.53/$2.81.
Railroad giant Norfolk Southern Corporation (NYSE: NSC) was up 10% in just the last week, based in large measure on super 4Q and FY2007 earnings released a week ago, January 22. Fourth quarter operating revenue increased 6% to $2.5 billion, and net income increased 4% to $399 million. What makes these numbers even more impressive is that Norfolk Southern posted revenue increases at the same time it faced significantly higher fuel costs and a measurable reduction in shipments by volume. Coal shipments dropped 2% by volume, while general merchandise shipments dropped a hefty 10% by volume.
The story is the same for FY2007 results. Revenue increased while shipments by volume decreased. And the railroad still made money. The stock closed at $45.07 on January 21, but closed at $52.00 on January 28. Very nice capital appreciation for a week. The company increased its dividend payout by 12% to $0.29 per share, a 32% increase over the last year, and the 102nd consecutive quarter of dividend payout. Clearly, Norfolk Southern is a stock for the very long haul.
Railroad giant CSX Corporation (NYSE: CSX) recorded record revenue of $10 billion for FY2007, the first time the company has crossed that threshold. CSX also posted record gains for 4Q 2007. EPS increased 15% to $0.86 per share on net earnings of $365 million. 4Q operating income increased over $100 million to $609 million.
CSX posted good revenue and productivity growth despite being hit with big increases in fuel costs. The company also posted significant improvements in its safety record. Over the past three years, CSX has posted the highest share price gain of any major railroad in North America, gaining 10% in just the last two days.
CSX CEO Michael Ward forecasts double-digit growth in both operating income and EPS for 2008. The stock currently trades in the mid-40s and may be worth a look for investors seeking some stability in the stock market.
Readers of this space know that the preference here is for large cap companies, with demonstrated business models, and favorable long-term factors, that have the resources to ride-out short-term economic downturns, including recessions.
And in this category a railroad stock represent a prudent addition to a portfolio, for investors who can tolerate moderate risk.
Pick a railroad. Virtually any railroad. Odds are, you will do fine, long-term, as the nation continues to re-discover the valuable asset - - the national treasury, really - - of its railroads. (More on that latter topic, in a future blog.)
Here are the railroad plays, ranked by risk, with the top stock, BNI, being the lowest risk. A stop/loss, if one were to buy the stock, is also listed:
The revival of the rails is not exclusive to the United States. Canada is seeing a healthy growth in railroad services, and Canadian Pacific (NYSE: CP) is worth an evaluation.
Analysts see 5.7% revenue growth for CP in 2008, in Canadian dollars, with grain, fertilizer and oil sands-related shipment gains offsetting declines in forest products.
Also of note: Analysts also expect CP to continue to improve rail system efficiency and fluidity, and overall asset utilization.
The above positives, combined with CP's strong free cash flow and modest pricing power, make the company an acceptance investment for moderate-risk investors. CP's modest p/e of 13 also tips the risk/return ratio to the purchase side of the scale. The Reuters F2007/F2008 EPS consensus estimates for CP are C$4.27/C$4.78. [Note: Currency figures are in Canadian dollars].
The risks? Like other rails, Canadian Pacific is vulnerable to the economic cycle, hence a slowdown in the global and/or U.S./Canadian economies will hurt CP's results.
Stock Analysis: Canadian Pacific is a moderate-risk stock not suitable for low-risk investors. Investors with an investment horizon longer than two years should be rewarded from CP's shares. Sell / Stop Loss for the shares in this company: $44.
Most transportation officials agree that the United States' transportation infrastructure - - highways, roads, bridges, mass transit systems - - is in need of a major upgrade in order to meet the nation's transportation needs of the 21st century.
The nation's public officials will begin to address the above concern in the years ahead, as public funds become available, but until they do, and due to crude oil's sustained high price, an opportunity has emerged for another transportation form: you guessed it, the railroads. And Norfolk Southern Corp. (NYSE: NSC) is a railroad worth a review.
Norfolk Southern provides rail transportation in the eastern U.S. and Canada, operating a 21,000-mile rail network. It's an elaborate intermodal and coal service network that also has a large freight business.
To say the bears on Wall Street have gained some momentum in late November 2007 would be an understatement.
The consensus now argues that U.S. GDP growth has slowed substantially, with growth likely to remain sub-par through at least June 2008, and the Dow's 1,400-point drop in about a month reflecting that consensus.
Nearly every sector looks vulnerable. Still, some sectors are faring reasonably well. The rails are one, and among the rails, Burlington Northern (NYSE: BNI) is worth an evaluation.
For nearly 30 years, the rails -- long neglected in the United States -- were considered passé. Then the globalization era dawned, along with its exports and demand for agricultural products and coal. Add intermodal shipments and a price of oil that's basically risen for ten years and the results is - the rails are back.
Way back in the 20th century, rails were hardly considered a growth play. But with consistent demand for commodities and raw materials, along with the (seemingly) continual rise in truck transport costs, the rails are becoming a primary shipment mode, which means good things -- long-term -- for rail companies.
Among the rails, CSX Corp (NYSE: CSX) is a company worth a review. CSX operates the largest rail network in the eastern United States, with a 22,000-mile network in 23 states and two Canadian provinces.
In general, analysts see CSX's revenue growth slowing somewhat in 2007, offset by better margins, pricing power (including expired contracts repricing) and improved asset utilization.
Further, coal traffic may slow heading into 2008, but intermodal traffic is expected to remain solid. Numerous infrastructure improvements and capacity increases should improve CSX's delivery times and reduce dwell times. In addition, trading around $42 with a p/e of 16, CSX currently is somewhat of a bargain, as Wall Street has discounted CSX's share for a U.S. economic slowdown, taking the stock down about 20% from a $52-high reached this summer.
I'm glad that I'm not the only one who is just a little miffed at the way that Fed chairman Ben Bernanke and his elite staff have chosen to handle our economy. My feelings fall pretty much in line with those of investment genius Jim Rogers. I listened to a short interview with him today on public radio. He pretty much confirmed my belief that the dollar could be going the way of the dinosaurs. For crying out loud, the Fed dumped about four tons of greenbacks on the financial system Thursday. Bank leaders such as Citigroup Inc. (NYSE: C) aren't generating enough profit to meet the demands of operation and to please the shareholders at the same time! What's the Fed going to do about the 80% profit decline at Wachovia Corp. (NYSE: WB)? A lower basis point for bank borrowing won't even scratch the surface of the cash shortfall. In fact, the lower the basis point the more it injures the bank's ability to make a profit on the loans that we need right now to salvage some home ownership scenarios from the mortgage debacle. How much more evidence do you need to realize we are living in a time of disastrous fiscal policy? We're lining up to make 1929 look like a cake walk.
And right now Buffett, head of Berkshire Hathaway (NYSE: BRK.A) is into Burlington Northern Santa Fe (NYSE: BNI) in a big way. According to information filed with the Securities and Exchange Commission, Buffett has upped his stake in BNI to 14.8%.
In BNI, Buffett is hooking up with a long-term, secular trend -- the revival and expansion of the nation's railroads. Aided by strong demand for commodities in the U.S. and abroad, and by an increase in transportation services, railroad companies are thriving. BNI, and Union Pacific (NYSE: UNP), and CSX Corp. (NYSE: CSX) have all benefited from solid demand for their services in the U.S. and robust growth in emerging market economies (particularly China, India and South America).
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.
For nearly 30 years, the rails, long neglected in the United States, were considered passé. Then the globalization era dawned, with its exports and demand for commodities. Add a price of oil that's basically risen for 10 years and the results is: the rails are back. And with the above in mind, 
I'm glad that I'm not the only one who is just a little miffed at the way that Fed chairman Ben Bernanke and his elite staff have chosen to handle our economy. My feelings fall pretty much in line with those of 
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