Railroad stocks are always a good leading indicator on the economy and the stock market. The biggest companies in this group have seen their share prices move back up to their highs at a time when the rest of the stock market is stuck in a trading range. In fact, almost all of the large railroad stocks aren’t just back up to their 52-week highs on the stock market; they’re actually trading right close to their all-time highs and that’s significant.
It’s pretty clear by looking at the economic data that the U.S.economy is experiencing an industrial/corporate recovery, while, at the individual level, the unemployment rate remains stubbornly high and home prices remain weak. Strength in railroad stocks is not yet correlated with the Main Street economy. The trickle-down effect is taking its sweet time.
Government bailouts, monetary stimulus, and very accommodative interest rates are somewhat helpful, but they aren’t strong enough to reverse this business cycle. The subprime mortgage meltdown was such a significant financial crisis that it will likely be 2013 before we see any marked improvement in the unemployment rate. While the economy continues to try and balance itself out, so does the stock market. Going forward, large corporations are likely to keep sitting on their cash hoards; reluctant to invest in new plant, equipment or employees for that matter. Making an economic forecast against this backdrop is almost foolhardy.
Railroad companies and railroad stocks are some of the healthiest large-cap businesses domestically. They have an advantage over the trucking industry in that higher fuel costs affect railroad companies to a much lesser extent. Right now, countless Wall Street analysts are increasing their earnings outlook for the railroad sector and railroad stocks are very likely to continue being the stock market’s strongest performers (see The Stock Market’s New Best Friend—Buffett Will Be Pleased). I’d say it’s a good stock market sector to buy on dips; but looking at the charts, railroad stocks aren’t down in price all that often. September was an opportune time to be a buyer. The entire group corrected, and then bounced back sharply.
Recent history definitely shows railroad stocks as leading the broader stock market (and outperforming as well). Pull up a longer-term stock chart on Norfolk Southern Corporation (NYSE/NSC), Union Pacific Corporation (NYSE/UNP), or Canadian National Railway Company (NYSE/CNI) and you’ll see some amazing wealth creation. And the charts don’t include dividend payments.
Railroad stocks are some of the oldest listed companies on the stock market. What is old is seemingly new again in the age of austerity. With a strong institutional following and Street analysts raising the earnings outlook on the railroad sector, these stocks are poised for even more capital gains over the near term.