By David Dutkewych
When most people think “hot stocks” the last thing they think about is “railroads.”
Yet, most railroad stocks are up between 10% and 50% from 12 months ago. But I believe there is still much more room for these stocks to go higher. And here are four reasons why.
And I expect an increase in freight demand this year. This will send railroad shares even higher in 2012.
• Improving US economy – Railroad companies primarily earn revenues by hauling freight. They’ll benefit from an improving economy for freight transport.
• Cheap – Rail transportation is the most efficient way to transfer goods around the US. Trains can move a ton of stuff for 500 miles on a single gallon of fuel. Since I don’t expect high fuel costs to go down anytime soon, demand for rail services should remain strong this year.
• Near Monopoly – Establishing a profitable railroad company requires an enormous amount of time and resources. Existing railroad companies have near- monopoly positions on their routes. Their resulting pricing power puts them in an excellent position to grow their profits.
• Oil Fracking – Fracking is the process of extracting oil and natural gas from shale by fracturing underground rock formations with a high-pressurized jolt of water, sand and chemicals. Fracking has been touted as the US answer to energy independence.
As this industry grows, so will railroads. Some of the key components in the fracking process need to be shipped by rail. And as demand grows for materials critical to fracking, like resin-coated sand and other chemicals, so will the need for rail shipping. We will see railroad company’s earnings grow right alongside shale production in the coming years.
As economic growth continues to strengthen, the railroad industry is poised to take full advantage. Railroad transportation is efficient and fundamentally solid. And, as a bonus, most railroad stocks pay a steady dividend.
I recommend these stocks: Union Pacific Corp (UNP), Kansas City Southern (KSU), Norfolk Southern (NSC), CSX Corp (CSX), and Canadian National Railways (CNI).
So do you agree? Do you think railroad stock prices are heading much higher this year? Or will the US’s growth slow pushing their shares down?
