Monday, May 18, 2009

Prospects Strong for Norfolk Southern

I'm starting to look at picking up some deals in stocks that will perform well when the economy picks up again. One of those is Norfolk Southern (NSC). Railroads were hot over the past five years, largely due to soaring energy prices. When Warren Buffett started investing in railroads, its seemed everyone was jumping on the bandwagon. I've done some research on a few of the majors, and I like Norfolk Southern the best. They all will be in pretty good shape when the economy rebounds, and the thesis is mostly the same for each. I did some work on NSC a couple of weeks ago when I did a piece for Fund my Mutual Fund. You can read that here.

I wanted to pass along a nice quote from their CEO at the annual meeting that sums up why to invest in railroads:

"Rail's future and our potential to help solve our nation's transportation crisis are as promising today as they have ever been," (CEO) Moorman said.

"The fundamentals of our business are very strong," he said. "The factors that drove our growth over the past five years -- higher fuel efficiency in a world with rising energy costs along with ever-increasing highway congestion -- are still there, along with our superior performance in terms of emissions and sustainability."

He outlined a couple of the main areas of strength for railroads, and I do agree with him. Who doesn't believe we're going to see high energy prices again? Its almost a guarantee. This is a major, major thing.

You can buy NSC for 1.33x book value and 9.5x forward earnings, which isn't bad. This is the type of stock you can likely wait for, and pick up when it pulls back. I don't think its going to run away from us.

Now, to be fair, railroads are one of the purest plays on the broad economy, which is still weak. They rely on high levels of output and goods moving from place to place. No question that is down right now. But that is why the stock is attractive. If you're willing to hold the stock for a while, I think railroads could really pay off, and especially Norfolk Southern.

No Current Positions.

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