Investing in Railroad Stocks

Railroad stocks were responsible for one of the first big investment booms in U.S. history. More than a century later, railroads remain a key part of the economy. Railroad stocks offer ownership in the companies that operate in the railway industry. Over the years, the industry has consolidated to a handful of titans responsible for moving most of the goods around the country and to and from ports.

As shippers and truckers faced disruptions during the COVID-19 pandemic, railroads held up better than most because of their unique 24/7 business model and ability to move a lot of cargo with very few people. And in an age where fuel efficiency is increasingly a priority, railroads are only growing in importance as the transportation solution of choice.

Transportation stocks tend to be cyclical, but rail holds up better than most in an economic downturn because rail companies are larger and better capitalized than trucking companies. Despite high oil prices leading to higher fuel bills, railroads also tend to do well when fuel costs spike because trains can transport a lot more cargo than trucks for each gallon of diesel burned.

For much of the 20th century, the railroad industry was plagued by bankruptcies. But today, thanks to years of consolidation and a recent push known as Precision Scheduled Railroading, the remaining companies are able to get more from their assets. The changes have brought down costs throughout the industry and allowed the companies to return more cash to shareholders.

2. Canadian Pacific

Canadian National (CNI -0.07%) has been public only since the mid-1990s, but the government entity-turned-private company provides access to almost every corner of Canada and a shipping link to the Gulf of Mexico. The railroad has more than 20,000 route miles of track and hauls agricultural products, energy, and containers from coast to coast.

Canadian National offers something that its U.S. counterparts can't match: Access to both the Atlantic and Pacific oceans, as well as all geography in between. The company is well-positioned to benefit from strong demand for Canadian energy assets and the impact of companies bringing their supply chains to North America.

5. Norfolk Southern

Norfolk Southern (NSC +0.99%) is the other Eastern-focused railroad, operating more than 19,000 track miles across 22 states and the District of Columbia. The company is a major transporter of industrial, agricultural, and consumer products and is a primary source of transportation for coal and auto parts. Norfolk Southern also has an extensive intermodal network in the East that carries containers from ship hulls to truck flatbeds.

It remains to be seen how long Norfolk Southern will be an independent company. The railroad has agreed to a merger with Union Pacific -- although the deal is subject to regulatory review and could take years to close.