It turns out Warren Buffett was right to stick with the boring sectors. Railroad stocks have been exceptionally strong performers during the economic downturn. Over the past month, the industry has soared more than 14% compared to just 4% for the S&P 500 index. And Mr. Buffett has definitely been cashing in with his Burlington Northern Santa Fe holdings.
The top 10 best performers over the past three months:
- The Greenbrier Companies (GBX) – 69%
- L.B. Foster Company (FSTR) – 59%
- American Railcar Industries Inc. (ARII) – 43%
- FreightCar America Inc. (RAIL) – 43%
- GATX Corporation (GMT) – 24%
- Kansas City Southern (KSU) – 24%
- Genesee & Wyoming Inc. (GWR) – 23%
- Westinghouse Air Brake Technologies Corp (WAB) – 21%
- Trinity Industries Inc. (TRN) – 19%
- Union Pacific Corporation (UNP) - 11%
Never Cheap, but Always Solid Opportunities
The railroad industry is not very cheap for investors. In fact, some railroad stocks are now trading near their 52-week highs. But they do have solid long-term potential and a durable competitive advantage that attracts investors like Warren Buffett. Meanwhile, railroad companies benefit from the combination of higher fuel costs and a potential economic recovery.
However, many other traders remain skeptical as evidenced by the strong short interest in many railroad stocks. These traders are betting that the slow economy will result in lower shipping volumes, while pricing power may start to weaken if fuel costs fall.
Warren Buffett Remains a Long-term Bull
Earlier this year, Warren Buffett issued a bullish long-term outlook on the railroad sector:
“Both of us are enthusiastic about BNSF’s future because railroads have major cost and environmental advantages over trucking, their main competitor. Last year BNSF moved each ton of freight it carried a record 500 miles on a single gallon of diesel fuel. That’s three times more fuel-efficient than trucking is, which means our railroad owns an important advantage in operating costs. Concurrently, our country gains because of reduced greenhouse emissions and a much smaller need for imported oil. When traffic travels by rail, society benefits.
Over time, the movement of goods in the United States will increase, and BNSF should get its full share of the gain. The railroad will need to invest massively to bring about this growth, but no one is better situated than Berkshire to supply the funds required. However slow the economy, or chaotic the markets, our checks will clear.”
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.