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Railroad companies and rail stocks might not seem like the sexiest investments in the world, but if you take a look at what's happening on the chart, your pulse might tell you otherwise.
Rail shippers have been posting huge gains over the last 6 weeks, easily outperforming the averages and their far sexier technology counterparts. No doubt that the strong market has helped, but taking a look at the fundamentals reveals there are a number of reasons that rail shippers look like great investments.
Domestic Economy Improving
Just a few weeks ago, everyone and their mother went full bearish, with the so-called "experts" calling for an economic contraction. But since then, we've seen some surprisingly strong data that tells a different story, with GDP, manufacturing and retail sales all coming in ahead of expectations. That means that in spite of painfully high unemployment, the economy is still expanding, juicing the business climate and stimulating demand for shipping services.
Crude is on the Move
The cost of energy is also a critical factor driving the trajectory of rail shippers. And in case anyone hasn't noticed, crude is back to $100, pushing gasoline costs above $4 a gallon. That makes rail shipping a very attractive shipping alternative to trucking, which is both energy, labor and maintenance intensive.
High Barriers to Entrance
Here's one that Warren Buffet would love. Rail shippers also operate in an industry with incredibly high barriers to entrance, keeping Johnny Come Lately that always wreaks havoc in technology on the sidelines. It's just not that easy to bring additional shipping capacities online, creating the perfect cocktail for rising prices on growing demand.
So now that we have set the stage for why rail shippers look like great long-term investments, let's go ahead and look at a few of our favorite names from the group.
Top 4 Rail Shipping Stocks
Kansas City Southern (KSU - Analyst Report) has been hot for the last 6 weeks, hitting a new all-time high on the strong market and Q3 results that beat expectations. Beyond that, KSU is a Zacks #2 Rank stock with an average earnings surprise of 5% over the last four quarters and a bullish 23% growth projection. Take a look below.
Norfolk Southern Corp. (NSC - Analyst Report) has also seen sharp gains, rallying more than 30% in the last 6 weeks. Norfolk is a Zacks #2 rank stock that produced an impressive 13% surprise last quarter. The company is also projected to grow its earnings by 12% next year. Take a look at the long and short-term trend below.
Canadian National Rail Co. (CNI - Analyst Report) looks much the same, posting big short-term gains while the long-term trend remains bullish. With a solid 12% growth projection and slightly discounted P/E relative to its industry, this is another interesting pick. Take a look below.
Genesee & Wyoming, Inc. (GWR - Snapshot Report) has also been trading strong, recently jumping back to its all-time high on a very bullish October. As a mid capper, GWR's forward P/E of 22X is a premium to its peers, but analysts are looking for bullish 17% earnings growth next year. Take a look below.
The Take Away
Rail stocks might not seem like the hottest investments on the Street, but as you can see from the charts, the industry is posting big gains on higher energy prices and high barriers to entrance.
Michael Vodicka is the Momentum Stock Strategist for Zacks.com. He is also the Editor of Zacks Whisper Trader Service. that uses analyst earnings whispers to jump on positive earnings surprises before they're announced for market-beating gains.