The Little Engine That Could: Zacks Railroad Industry

In early June 2017, the 10-company strong Transportation – Railroad industry steadily chugged to the vaunted front of the Zacks Industry pack.

U.S. Class I (aka major trunk line) Railroads show up in the Top 11% (#27 out of 265) of industries we rank. This week, Zacks counted 7 positive earnings estimate revisions and zero negative estimate revisions from covering analysts.

Further, across the entire industry landscape of U.S. transportation, we see the story of ‘big freight’ unfold in a fuller set of bullish Zacks Industry Rankings.

The Transportation Industry chart (below) shows.

U.S. Transportation Industries Hum — Midway in 2017

Realize: Around half of a stock’s action can be attributed to its industry.Over the last 10 years, using a one-week rebalancing technique, the top half of Zacks Industry Ranks beat the bottom half by a factor of more than 2 to 1. If you tap only the Zacks #1 (STRONG BUY) Ranks within that industry, this returns story gets even better.

Bullishly, in a U.S. growth context, Air Freight and Cargo sits in the Top 17%; Shipping sits in the Top 41%; and Transportation-Services sits in the Top 42%.

Strong Air Freight and Shipping ranks are an added GDP growth ‘tell.’ The U.S. economy — after a lackluster 2017 start — picked up goods demand meaningfully.

To economists, this is pro-cyclical. Confident consumers step up to the plate. They close more deals to buy big-ticket items that require long-term financing.

In a more subtle bullish global growth context, Truckers showed up in the Bottom 13%. Those stocks fight declining earnings estimate revisions — due to higher gasoline prices.Global growth-related gasoline demand has picked up.

During prior years in this cycle, railroad stocks took a beating.

This was due, in part, to the falling fortunes of coal. Coal accounts for nearly 40% of railroad tonnage and 15% of revenues. Declining North American oil and gas production, as well as the increasing use of oil pipelines over rail tank cars, also took down revenue growth.

As a result, a key Railroad industry valuation metric, the Price to Earnings Growth (PEG) ratio, is 1.69 versus a 1.97 for the overall SP 500.

That’s another ‘tell.’ Railroad shares stand out as a relative large-cap bargain.

Traders look for a bullish edge. They buy growth-catalyst-driven industries at a reasonable price. Retail investors can do that too. North American fracking rig counts are moving up again. Coal production gets support from a new administration. Buy these old-fashioned value stocks on a turnaround.

Warren Buffett took Burlington Northern Sante Fe private in 2009. How’s that for stellar cyclical timing?

My Top 3 Railroad Picks

I list my 3 favorites, flowing straight from current Zacks Ranking.

(1) CSX Corporation ( CSX ): This is the sole Zacks #1 Rank (STRONG BUY).

As an aside, did you ever played the popular Parker Brothers board game Monopoly ? It dates back to 1903. You will know that there are four Railroads to buy. The BO (Baltimore Ohio) line is now part of CSX. 

Back then the BO slogan was ” Linking 13 Great States With The Nation.

(2) Norfolk Southern ( NSC ): It’s a Zacks #2 Rank (BUY).

(3)Union Pacific ( UNP ): It’s a Zacks #2 Rank (BUY).

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Union Pacific Corporation (UNP): Free Stock Analysis Report

Norfolk Souther Corporation (NSC): Free Stock Analysis Report

CSX Corporation (CSX): Free Stock Analysis Report

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