Keeping It Rolling—U.S. Energy Boom Good News for Railroad Stocks

Written by Mitchell Clark, B.Comm., Profit Confidential

Railroad stocks as a group have returned to their 52-week highs. I like Union Pacific Corporation (NYSE/UNP) and Canadian National Railway Company (NYSE/CNI). They are the strongest of the group and are trading right at their all-time record highs.

These two companies are worth accumulating when they’re down. According to history, they are typically not down for long. Wall Street keeps edging their earnings estimates higher for 2013 and 2014. Railroad stocks are pretty good with their guidance.

Bakken oil (and natural gas) is a huge opportunity for the U.S. economy. The production boom is happening now, with all its benefits, disadvantages, and costs. But a lot of junior oil stocks playing this patch aren’t moving upward in the stock market in the face of weak oil prices. The Bakken oil boom itself is a counter play on rising prices.

Phillips 66 (NYSE/PSX), a real winner since being spun off from ConocoPhillips (NYSE/COP), recently announced it will ship Bakken oil from North Dakota to New Jersey by rail. According to the Association of American Railroads, in 2008, U.S. Class I railroads originated 9,500 carloads of crude oil. In 2011, the number was 66,000 carloads. The final number for 2012 is expected to exceed 200,000 carloads, and railroads are also expected to deliver large amounts of frac sand to drill sites. This is a seriously good trend for railroad stocks. The stock chart for Phillips 66 is featured below:

Chart courtesy of www.StockCharts.com

Of course, the Bakken oil boom has its consequences, and we’re not even talking environmentally. Make no mistake: big oil is not interested in U.S. energy independence. Its only concern is how to maximize profits per barrel of Bakken oil and traditional production. As usual, gasoline consumers are unlikely to benefit.

Railroad stocks have been a favorite of mine for years. The majority of the players in this sector have solid track records of creating wealth for shareholders. And they are good at forecasting their business conditions, which makes them great benchmark stocks. (See “Large-caps Shine as Dow Jones Industrial Average Toys with All-time High.”) Railroad stocks are simple to research and understand; the infrastructure has already been built, and they are proven old economy companies with staying power.

There are a lot of headwinds ahead for individuals in this economy. But there is great potential in Bakken oil, the U.S. energy industry, and railroad stocks going forward.

Being at their highs, railroad stocks are vulnerable to the upcoming correction. This will create an investment opportunity. Railroad stocks are certainly a group I would not bet against.