This Is the Sector to Own as Fuel Prices Rise

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For most of us, rising fuel prices have us wanting to pull our hair out -- or at minimum shake a disdainful fist at that passing Chevron station for having the audacity to price their regular unleaded gas more than $4 per gallon. No matter where you look, fuel prices are on the rise, and the transportation sector is feeling the effects.

Airline company AMR (NYSE: AMR  ) has recently been scrambling to raise its flight prices, while trucking company Werner Enterprises (Nasdaq: WERN  ) may struggle to meet profit projections next quarter if gasoline prices continue to climb. Even shipping juggernauts UPS (NYSE: UPS  ) and FedEx (NYSE: FDX  ) may succumb to lowered earnings guidance based on the rising costs of jet fuel and gasoline.

After hearing all that, it might appear that the transportation sector is the worst possible place you could put your money with oil prices rising -- but you'd be wrong. The one key component to the transport sector that appears to be the absolute best play on rising fuel costs is railroad companies.

Railroad companies use far less fuel than a standard diesel truck, and technological advances have allowed them to become significantly more fuel efficient than they were even a decade ago. They have also invested heavily into their own infrastructure to make those cost savings extend even further. Total carloads increased 7.3% in 2010, and through the first two months of 2011, they're showing a more than 5.1% increase. These levels are nowhere near where they were in 2008, but that only means there's still plenty of opportunity for growth.

Keep on railin'
Union Pacific
(NYSE: UNP  ) is a smart choice if you're looking for the potential for price appreciation along with a growing dividend. Since late 2006, Union Pacific's quarterly dividend has more than doubled from $0.15 a share to $0.38 a share. Over the trailing 12 months, the company generated $4.1 billion in operating cash flow, which easily supports those impressive dividend hikes.

For investors looking for a higher-risk growth play, they may want to take a closer look at Genesee & Wyoming (NYSE: GWR  ) . Genesee's five-year projected growth rate of 21% dwarfs nearly every other company in the sector. Despite rising more than 70% in the past year, the company is still relatively inexpensive if you consider its PEG ratio, which is just barely more than 1.0.

Finally, don't neglect the outlying companies that make railroad transportation possible. American Railcar Industries (Nasdaq: ARII  ) builds hopper and tank railcars in the U.S., and it's very likely that increased demand for rail transport will translate into an increase in orders for more railcars. It shouldn't come as any surprise, then, that revenue growth expectations are for 67% this year and 48% next year for American Railcar.

Do you have a strategy to battle rising fuel prices? Share your thoughts below and consider tracking these stocks and your own personalized portfolio of stocks with the free and easy-to-use My Watchlist.

Add Union Pacific, Genesee & Wyoming, and American Railcar to My Watchlist.

Fool contributor Sean Williams does not own shares of any companies mentioned in this article. He would like to remind you not to forget about our friends in Japan who could use a helping hand. You can follow him on CAPS under the screen name TMFUltraLong. Genesee & Wyoming is a Motley Fool Hidden Gems selection. FedEx is a Motley Fool Stock Advisor choice. The Fool owns shares of FedEx and United Parcel Service. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that looks both ways before crossing the track.

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10/24/2016 4:00 PM
ARII $38.18 Down -0.16 -0.42%
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UNP $89.88 Down -0.49 -0.54%
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