A Great Way To Get Your Portfolio Back On Track
The Dynamic Wealth Report
October 8, 2010
by Robert Morris, Editor
When I was studying law at George Washington University in
Washington, D.C, I spent most of my time in class or at the library. But
every so often I would take a well-deserved break.
My favorite excursion was shooting up to New York City for a weekend.
Instead of taking a flight though, I would head over to Union Station
and climb aboard an Amtrak train. The train would take me directly to
Penn Station in under three hours. And it was a lot easier on the
wallet.
I loved “riding the rails”.
The rhythmic clickety-clack of the wheels was somehow reassuring. The
gentle swaying of the car was soothing and relaxing. And I truly enjoyed
watching the colorful countryside speed by.
It was a slice of Americana I’ll never forget.
So what got me reminiscing about the railroads?
I recently read a report from the Association of American Railroads. The
report said, “U.S. railroads saw the highest weekly intermodal volume
for 2010 and highest container count on record for the second
consecutive week.” That was for the week ending September 25th.
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Rising rail freight volume is a strong indicator the U.S. economy is
recovering. And record numbers mean it's happening faster than many
thought just a few weeks ago.
In fact, freight loads are now approaching the 2008 highs. If the trend
continues, we should see volumes surpass those pre-recession peaks soon.
That would be a strong sign the economic recovery is firmly “on track”.
Of course, improving rail freight volumes aren’t just good news for the
economy. They also bode well for the freight railroad operators. It
won’t be long before revenues and earnings are growing even faster.
And let’s not forget about the railroads’ “secret weapon” for increasing
profits.
I’m talking about the Staggers Rail Act.
This important piece of legislation was signed into law by President
Carter in 1980. It literally saved our nation’s railroads from certain
obliteration.
You see, back in the 1970s, America’s railroads were on the verge of
ruin.
Suffocating government regulation, intense competition from trucks and
barges, and changing shipping patterns had taken a heavy toll. A good
number of American railroads were bankrupt or nearly so.
The Staggers Rail Act gave the railroads new life…
The most important part of Staggers is the secret weapon I alluded to
earlier. I’m talking about a provision giving railroads the discretion
to base their rates on market demand.
In other words, the railroads (not the government) get to decide what
rates to charge shippers. They also have the ability to raise rates.
Thanks to Staggers, railroads are raising rates 5% (above inflation)
every year. And it’s helping railroads maintain double-digit profit
margins.
What’s more, Staggers has made railroads the transporter of choice for
shippers. From the shipper’s perspective, rail transport is cheaper and
more fuel-efficient than truck and ship transport. If you have to ship
something mid-to-long distance, rail is a no brainer.
With the economy gaining speed and rail freight volumes increasing,
railroad stocks are looking good. There are a few railroads with strong
growth outlooks and reasonable stock prices, including: Kansas City
Southern (KSU), Union Pacific (UNP), Norfolk Southern (NSC), and
CSX
(CSX).
Take a closer look at a few of these stocks now. They’re a good way to
play the ongoing economic recovery in the U.S.
• RBC Capital Markets upgraded BMC Software (BMC)
to Outperform. The analyst believes we’re early in a new cycle of rising
corporate IT spending on software for managing enterprise systems. He
bumped his price target up from $44 to $50 per share.
• JinkoSolar (JKS) and Yingli Green
Energy (YGE) were both downgraded by Oppenheimer from
Outperform to Perform. The analyst believes these solar stocks are
trading near fair value. Price targets are $31 and $14 respectively.
• RBC Capital Markets initiated coverage on Illumina (ILMN) with
an Outperform rating. The company is a leading provider of technology
for sequencing DNA. The analyst set a price target of $59.
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