Railroad traffic is a barometer of economic activity. In 2023, that worked in favor of the sector. But in 2024, it’s been a different story. That said, railroad stocks are ones that investors buy for the long haul (no pun intended). And the market projected growth rate for railroads is expected to increase at an annual growth rate of 5%. That gives investors a good reason to look for railroad stocks to buy.
One catalyst for this demand is likely to come from the push for onshoring of corporate supply chains. In 2020, many corporations learned that having a global vision should still allow for manufacturing and shipping without disruption. Railroads will be vital to moving the commodities and other essential components that will allow uninterrupted manufacturing at scale.
In addition to the growth in global freight, this sector will also come from the continued advancement of high-speed rail and growing passenger activity. If you’re considering this sector, here are three railroad stocks to buy.
Union Pacific (UNP)
As mentioned in the introduction, increased demand for global freight will increase revenue and earnings. That’s the base case for Union Pacific (NYSE:UNP), which has the largest rail network but mainly comprises commercial operations, not passenger operations.
After growing sharply year-over-year (YOY) in 2022, the trend has reversed, albeit not as sharply in the last four quarters. The same was true of earnings, but that’s been changing in the previous two quarters. In addition to improved earnings, the company’s free cash flow (FCF) in its most recent quarter totaled $525 million, or more than double YOY.
Analysts remain bullish on UNP stock. It has a consensus Buy rating with a $274.26 price target that offers investors a 17% upside. The stock also has 16 Strong Buy ratings out of the 30 analysts who provide a rating. United Pacific also pays a dividend with a 2.2% yield, which has increased for 17 consecutive years.
CSX (CSX)
As often happens among stocks in the same sector, CSX (NYSE:CSX) has had a similar trend with revenue and earnings in the past year. Some analysts are concerned that the next few quarters may continue to be difficult due to the company’s reliance on access to the Port of Baltimore’s coal terminals.
Some of that pessimism may be reflected in the current CSX stock price, down 4.48% in the 30 days ending May 22, 2024. That’s after the company reported a beat on the top and bottom lines in its April earnings report. At the time, the stock was hovering at its 5-year high, close to the all-time high for CVX stock.
Analysts believe the stock can get back to that level. Investors get a small dividend in terms of yield (1.42%) and a payout of just 48 cents per share annually. However, it has been growing for 20 consecutive years.
SPDR S&P Transportation ETF (XTN)
Considering short-term volatility in the railroad sector, the SPDR S&P Transporation ETF (NYSEARCA:XTN) may be a profitable alternative. The introduction noted that the railroad sector is expected to post annual growth of around 5% in the next ten years. The XTN ETF has generated an annualized return of 5.95% over the last 10 years.
The fund provides only about 7% exposure to the railroad sector, but it has both stocks mentioned above among its 43 holdings. The fund also exposes you to stocks in the airlines, logistics and marine sectors.
This equal-weight ETF is indexed to the S&P Transportation Select Industry Index. It has $166 million of assets under management.
On the date of publication, Chris Markoch did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
