Riding the Rails

I'm always intrigued when several top advisors see similar opportunities. "The rails are one the best places to put your money in the market today," says Jon Markman, who along with  Louis Navellier, Richard Moroney, Ken Kam, and Elliott Gue , are "riding the rails."

(For more on the advisors cited below, please click on their photos.)

"Virtually all of the rails are set to deliver very strong, above-consensus earnings-per-share growth in 2006 and 2007 as an underinvestment in capacity, smart investments in productivity-enhancing technology, and share buybacks all pack a punch. notes Jon Markman, in his recently launched newsletter, Strategic Advantage. "Norfolk Southern ( NSC NYSE) and CSX Corporation (CSX NYSE) are two of my favorites. 

"NSC is growing the volume of its intermodal (container cars) and coal business while steadily leveraging its back office. The business is much more than coal though, as aluminum, agricultural goods, fertilizer, and the like are all increasing their usage of the rail system to move goods to customers. Meanwhile, NSC put a lot of money into hiring new employees in 2005 and also into investments in new and refurbished rail cars and locomotives. That spending put cost pressures on earnings last year that will show up as gravy this year— so I think there is a lot more upside to estimates than is widely understood. It's a great buy right now.

"One of our new buy recommendations is Genesee & Wyoming (GWR NYSE)," says Louis Navellier, in his Emerging Growth Letter . "The company owns stakes in more than 40 shortline and regional freight railroads that operate over some 11,200 miles of track in North America and Australia. The company is North America’s second largest operator of short-line railroads. Genesee and its Australian joint venture partner, Wesfarmers, have agreed to sell the Western Australia operations of their Australian Railroad Group.

"CEO Mortimer Fuller, the great-grandson of founder Edward L. Fuller, controls a 40% voting stake. The company recently announced that the traffic on its North American freight railroads increased in February by 20.7% to 64,327 carloads. Traffic increased in coal coke and ores, but fell in lumber and forest products. The company also noted that its Mexican service continued to be affected by fallout from Hurricane Stan. As for its Australian operations, traffic was up 5.9% to 76,893 carloads in February. The stock recently split 3-for-2 and is a great buy below $33."

"We have done very well in our portfolio with railroad stocks and I think the next wave of the story is companies that sell infrastructure and services to the rail industry. That list includes rail signaling and communications gear maker Wabtec ( WAB NYSE). The company should benefit handsomely as the rails redeploy their cash flows to upgrade their tracks and rail networks to meet new demands. Another interesting play on the industry is Greenbrier Companies ( GBX NYSE), which manufactures all types of railcar and sells them to the railroad industry.

"As rails expand their capacity and try to increase their transport of coal, they will need more railcars. In fact, the industry is currently experiencing a shortage of several major types of railcar. Railcars, just like automobiles, wear over time. Parts like shocks, wheels, and braking systems need repair and maintenance from time to time. Overall, the current backlog of repair orders and new railcars totals close to $500 million; Greenbrier's market capitalization is just over $650 million, so that's a big number indeed. More aggressive investors should consider Greenbrier a buy under 42.50 with a stop at 36."

Greenbrier is also the latest featured recommendation from Richard Moroney, in his small cap, growth-riented service, Upside. He notes, "Capitalizing on an upturn in the railroad industry, Greenbrier (GBX NYSE) is delivering impressive growth. Greenbrier delivered 13,200 railcars in fiscal 2005, up from 10,800 in fiscal 2004. Strong relationships with rail carriers and manufacturers give Greenbrier a competitive edge. In February, GBX received a $100 million order from American Honda Motor—the largest-ever order for its autotransport railcars.