It is not easy being a railroad bull these days. The stocks have had a good run in recent years, given their ideal position to haul commodities and retail goods from coast to coast in North America and their ability to take business away from trucking companies because of high energy costs associated with road travel. But the uncertain North American economy is threatening to put an end to the good days, and railroad stocks have turned volatile recently. Is the end nigh?
No way, according to BCA Research. The Montreal-based firm lifted its recommendation on the industry group to "overweight" at the end of January and nothing has swayed them from this position since. Strong commodity freight volumes mean that capacity is still tight and coal shipments should pick up with rising natural gas prices, which tend to trigger a rush toward fuel substitution.
Yes, intermodal shipments - or containers that are transferred among various transportation modes - are a soft spot right now. But BCA Research believes that the economic stimulation provided by the U.S. Federal Reserve should alleviate some of the pain. Besides, price cutting at struggling retailers is usually a good sign that intermodal freight cargo volumes are set to increase.
"In past cycles, aggressive price discounting at retailers has foretold of a rebound in intermodal freight cargo," BCA Research said in a note to clients. "Importantly, railroad earnings are linked to volumes, and not the value of cargo carried."
The S&P 500 Railroads index is up 7 per cent this year, compared to a 7.4 per cent decline of the broader S&P 500 index. BCA Research said that the recent break-out in the index is the beginning of a cyclical uptrend. In Canada, Canadian Pacific Railway Ltd. shares are up 9.7 per cent this year and Canadian National Railway Co. shares are up 12 per cent.