By Mitchell Clark, B.Comm.
It’s been a very choppy start to the year for stocks and with no real trend to latch onto, the news of the day is the catalyst for the trading action.
There is still a positive undercurrent in the equity market, and it’s evidenced, in part, by particular strength in a number of key stock indices. (See “If This Indicator Turns, the Stock Market’s in Trouble…”) But it’s also apparent in a number of leading stocks—the positions that led the stock market in its 2013 breakout performance.
One of these stocks that continues to be a standout and outperformer is Union Pacific Corporation (NYSE:UNP), an old economy railroad stock that is very much a canary in the coalmine for the U.S. economy. The railroad business has been exceptionally good the last few years. And if coal shipments have diminished, then oil and fracturing sand have made up the difference and then some.
But for regular freight, business conditions have been pretty decent, according to the railroad companies, and this is material news that rises above the noise. Vehicle shipments have been strong, which has helped a lot.
According to Union Pacific, in spite of what management referred to as significantly weaker coal shipments, volume growth and pricing gains in regular freight produced a record fourth-quarter operating ratio (a measure of profitability) of 65%. The company reported that its fourth-quarter operating revenues grew seven percent to $5.6 billion, up from $5.25 billion in the same quarter of 2012. Management said that volume growth from agriculture, automotive, intermodal shipments, and industrial products more than offset declines in coal and chemicals.
Agriculture volume was up 19% comparatively, followed by a 17% gain in automotive shipments, and a 14% gain in the volume of industrial products. Union Pacific’s stock chart is feature below:
Chart courtesy of www.StockCharts.com
Most railroad stocks have been doing exceptionally well, partially because of the broader market’s reflation, but also because of their own financial performances.
Union Pacific is always a great benchmark company to follow; it’s a barometer for stocks in general and a very profitable business that pays a decent dividend. This is a company that’s worth considering when it’s down, which, historically, is not that often. If Union Pacific’s share price is going up, then you’d be hard-pressed betting against the broader market for any meaningful duration. The company’s next set of financials are due in about a month, and the numbers will be important in terms of keeping this position at its record high and also for the broader market.
Railroad stocks are old economy, but so much economic activity is associated with freight and railroads really are the backbone. In a way, railroad stocks are a leading indicator, and that’s why I wouldn’t bet against the broader market if this sector is pushing its highs.
The Dow Jones Transportation Average (NYSEARCA:IYT) (comprising four U.S. railroads) is such a key index and it is a trendsetter. Stocks will likely keep bouncing around in the absence of earnings reports, but railroad stocks offer comfort. The market is unlikely to turn without them.