Your Stock Just Got Tagged: Railroads

At The Motley Fool, we don't usually take a "top-down" approach to picking stocks. Rather than allowing industry or macro forecasts to drive our investment decisions, we focus primarily on each company's fundamentals.

At times, though, it's certainly possible for us to single out attractive stocks by closely watching the market's prevalent trends. Great fundamentals unquestionably lead to price appreciation, but finding companies with those qualities often starts with some keen observation.

Tagged and bagged
The tagging tool found in our Motley Fool CAPS community is one great way to investigate interesting investment themes. CAPS is home to more than 4,500 rated stocks, and our tags organize those stocks into specific groups for you.

Tags range from obvious index, sector, and country classifications, to more creative categories -- businesses with "Top Brands," managements undergoing an "SEC Investigation," and even companies that have earned "Military Contracts." There are over 600 tags in CAPS for you to explore, and you can view all of them for free right here.

Playing with trains
To get you started, we'll walk you through a specific tag and touch on its underlying theme. Since railroad companies have attracted a lot of attention recently -- as a result of big purchases made by some high-profile investors -- a closer look at this sector might prove profitable.

Type the word "Railroads" in the tags search box, and these are some of the stocks you'll find:

Company

Market Cap

CAPS Rating
(out of 5)

Burlington Northern Santa Fe (NYSE: BNI  )

$33.49B

*****

Union Pacific (NYSE: UNP  )

$33.04B

****

Canadian National Railway (NYSE: CNI  )

$28.36B

*****

Norfolk Southern (NYSE: NSC  )

$23.06B

*****

CSX (NYSE: CSX  )

$20.18B

****

Trinity Industries (NYSE: TRN  )

$3.73B

*****

Genesee & Wyoming (NYSE: GWR  )

$1.34B

*****

For simplicity, I've chosen some of the more well-known, highly rated companies to single out among the 18 stocks that bear the "Railroads" tag. All are businesses that operate their own railroad or that are tied to the tracks in some way.

Another cool feature of tags: They provide the returns for each category, sort of like a mini-index. For our group of 18 railroad stocks, the daily, 30-day, and one-year returns are:

Yesterday

30-Day Return

1-Year Return

0.10%

9.78%

24.47%

Data from Motley Fool CAPS (as of 06/04 close).

Warren Buffett and Carl Icahn are two of the more prominent investors who've been wetting their steam whistles lately. A few weeks ago, Buffett disclosed an 11% stake in Burlington Northern (with smaller positions in Union Pacific and Norfolk Southern), while Icahn revealed his investment in CSX. Judging from the one-month and one-year return on our railroad tag, I'd say the two bigwigs are pretty pleased with their purchases thus far. Naturally, the Foolish question is why these investments were made.

As my friend Matt Koppenheffer reported from this year's Woodstock for Capitalists, Berkshire's investment in the rails is a drastic change from its negative view on the industry. Buffett cited deregulation and an improving competitive position over recent years as the main reasons for Berkshire's investment. Although Buffett admitted that railroads would never be a great business, technological innovations, increasing returns on capital, and rising fuel costs -- which are hurting truckers far more than railways -- now make it a good business. The bad news, of course, is that the recent run-up in railroad stocks may prevent new investors from buying in at a good price.

You have to decide for yourself whether the bump has more to do with improving fundamentals or copycat fever. But what I can tell you is that our CAPS community has been in love with railroad stocks for quite some time now.

For example, our CAPS community had a five-star rating on Burlington and Norfolk long before Buffett disclosed his stakes in the two companies (as evidenced in this article from yours Fooly). So, even though the train may have already left the station, you can bet that our CAPS community is finding other cheap and attractive sectors to board.

Now, if you're still considering whether or not to ride Buffett's coat-rails, here are three comments from CAPS that may help you decide:

•  CAPS resident mcreilly draws on the Oracle's cost analysis and says, "Amid the oil cost debates, people are turning to coal for heating and energy production. These things all need mass transportation across the country, something rail is very good for. Lastly, with higher fuel costs, delivery companies like UPS are finding it cost effective to ship their ground delivery packages via rail rather than by truck."

•  Meanwhile, CAPS All-Star darkflame talks about the steady, stable, and even unexciting nature of the rails: "Historically, the railroad industry has been outperforming the S&P while high-tech has not. And why? Because it's so boring that the stocks are usually cheap, rail stocks often pay a dividend, and there are stock repurchases too."

•  For contrast, lwabalos warns us not to race Burlington Northern to the crossing: "The stock is currently overpriced because of Warren Buffet's buy of BNI stock. Everyone has jumped on the band wagon and caused the price to jump ... If it were not for this overpricing due to the Buffet buy, I would say it would OUTPERFORM."

Tag ... now you're it, Fool  
Whether you'd like to invest in a specific industry like railroads, profit from the recent sub-prime debacle, or scour through the beaten-down housing sector, finding great stocks often begins by selecting a category of interest and then drilling down to find the goodies.

Our Motley Fool CAPS community is an exceptionally useful way to research a multitude of investment trends taking place in our world. So, join Motley Fool CAPS to start using the Tags tool right away. It's tons of fun and it won't cost you a cent.

For more CAPS Foolishness:

Fool contributor Brian Pacampara owns no position in any of the companies mentioned. UPS is a Motley Fool Income Investor pick. The Fool has a disclosure policy.


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