Shares of RailAmerica
How it got here
RailAmerica has rocketed higher this year partly because of improving earnings and speculation of a buyout or asset sales. The rail operator controlled by Fortress Investment Group
The confidence from the market is new for this small rail company. Until recently, RailAmerica was underperforming rivals like Genesee & Wyoming
The argument made by analysts is that further cost reductions are possible at RailAmerica, which would justify a higher price in a buyout. As you can see below this isn't a far fetched idea with profit margins as low as they are.
Return on Assets
|Genesee & Wyoming||2.2||5.3%||14.2%||14.7|
Source: Yahoo! Finance.
For now, investors should focus on the steady improvement in earnings, which will continue to drive shares even if a buyout doesn't happen.
Betting on buyouts is a risky game, and if you buy RailAmerica at this new high, I wouldn't do it because of that. But as I pointed out above, there does appear to be room to enhance profitability and improve operations, so this wouldn't be a bad buy here.
Personally, I would stick with a cheaper railroad stock like Norfolk Southern, which also pays a strong dividend. CAPS members have other ideas, giving RailAmerica stock a five-star rating (out of five), and 106 think it will outperform the market. The fast jump in shares just has me worried that the stock will soon slow down. After all, the railroad business isn't exactly known as being one of the fastest growing businesses on the market.
Fool contributor Travis Hoium rides Reading Rail and does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.
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