Fed: Full Steam Ahead for Rail Stocks

by Alyssa Oursler | June 19, 2013 2:10 am

Domestic railroad stocks have been chugging along so far in 2013, outpacing the broader market’s gains.

ycharts chart 15 300x202 Fed: Full Steam Ahead for Rail Stocks
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Since Jan. 1, Norfolk Southern (NSC[1]) and Union Pacific (UNP[2]) have each gained 25%, CSX Corp (CSX[3]) has boomed 26%, and Canadian Pacific Railway (CP[4]) is the “laggard” with a 23% run in the books.

Plus, CP was faring better before news broke that activist investor Bill Ackman is trimming his stake in the railroad.

So, should investors fear the sector’s run-up and follow Ackman out the door?

Hardly. Instead, economic data just released by the Federal Open Market Committee confirm that more upside is likely around the bend.

ycharts chart 13 300x196 Fed: Full Steam Ahead for Rail Stocks
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As you’re probably aware, railroads are just one breed of cyclical stocks — stocks that generally flourish as the economy recovers, but also follow it south.

Just take a look at the two charts to the right showing Norfolk Southern and CSX Corp.’s stock performance vs. U.S. GDP growth over the past five years. The correlation is unmistakable.

ycharts chart 12 300x196 Fed: Full Steam Ahead for Rail Stocks
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It’s almost no wonder, then, that an upward near-term GDP revision back in January was followed by an eye-popping first quarter. A quick sample:

Of course, nothing lasts forever. Since then, a downward near-term revision came in March … and yet another one came today. Now, full-year GDP growth is slated for 2.3% to 2.6% – lower than a previous range that went up to 2.8%, and a substantial drop from even earlier expectations around 3% for the year.

But look at this chart showing GDP forecasts through 2015 … and keep in mind the correlation with rail stocks’ performance from the charts above.

rails2 Fed: Full Steam Ahead for Rail Stocks

Looking further down the road — as you should as an investor — GDP growth is slated to keep moving upward over the next year or two. As a result, cyclical railroads stocks should follow.

Heck, the Fed actually raised its predictions for 2014 today, with the new range calling for growth between 3% to 3.5%. That, along with the 2.9% to 3.6% range for the year after, makes for a pretty substantial improvement from the 2.4% last recorded on the GDP line plotted against NSC and CSX.

The bottom line: As many have mentioned amid chatter about interest rates and stimulus, we are still far from a full recovery[5]. That means the economy should keep on getting better, and that’s what the Fed’s policymakers are projecting. The best days aren’t in the books yet … so railroads still have room to run as the economy gains steam.

Any weakness in the second half of the year should be seen as a buying opportunity.

As of this writing, Alyssa Oursler did not own a position in any of the aforementioned securities.

Endnotes:
  1. NSC: http://studio-5.financialcontent.com/investplace/quote?Symbol=NSC
  2. UNP: http://studio-5.financialcontent.com/investplace/quote?Symbol=UNP
  3. CSX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CSX
  4. CP: http://studio-5.financialcontent.com/investplace/quote?Symbol=CP
  5. still far from a full recovery: http://investorplace.com/2013/06/why-higher-rates-aint-here-to-stay/

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