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 Zacks.com 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 S&P 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 - Free Report) ):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 B&O (Baltimore & Ohio) line is now part of CSX.
Back then the B&O slogan was “Linking 13 Great States With The Nation.”
(2) Norfolk Southern (NSC - Free Report) ): It’s a Zacks #2 Rank (BUY).
(3) Union Pacific (UNP - Free Report) ): It’s a Zacks #2 Rank (BUY).