Although they may not be high tech, railroad companies can be enormously profitable to own over the long-term. Not only do many railroad companies have wide moats given the capital needed to compete, but railroads also have pricing power over many customers that ensure steady dividend payouts and stock price appreciation.
In this article we’ll take a closer look at the smart money’s five favorite railroad stocks, Canadian Pacific Railway Limited (USA) (NYSE:CP), CSX Corporation (NASDAQ:CSX), Kansas City Southern (NYSE:KSU), Norfolk Southern Corp. (NYSE:NSC), and Union Pacific Corporation (NYSE:UNP), and see how these companies have been performing this year.
Hedge fund sentiment is an important metric for assessing the long-term profitability. At Insider Monkey, we track over 765 hedge funds, whose quarterly 13F filings we analyze and determine their collective sentiment towards several thousand stocks. However, our research has shown that the best strategy is to follow hedge funds into their small-cap picks. This approach can allow monthly returns of nearly 95 basis points above the market, as we determined through extensive backtests covering the period between 1999 and 2012 (see the details here).
#5 Kansas City Southern (NYSE:KSU)
– Number of Hedge Funds Long the Stock (as of March 31): 34
– Total Value of Hedge Funds’ Holdings (as of March 31): $902.92 million
Given the stock’s almost 30% year-to-date rally, it’s not surprising that 34 funds that we track owned shares of Kansas City Southern (NYSE:KSU) at the end of March. Not only did Kansas City Southern wallop the second quarter bottom-line expectations that analysts had for it, with earnings of $1.22 per share routing the estimates of $1.04, but the stock also trades for a reasonable 18-times forward earnings estimates. Quant fund Renaissance Technologies, founded by billionaire Jim Simons, opened a position consisting of 402,600 shares of Kansas City Southern during the second quarter.
#4 Norfolk Southern Corp. (NYSE:NSC)
– Number of Hedge Funds Long the Stock (as of March 31): 35
– Total Value of Hedge Funds’ Holdings (as of March 31): $716.93 million
Analysts are somewhat mixed on Norfolk Southern Corp. (NYSE:NSC), as 13 have ‘Hold’ ratings on it, while eight have ‘Buy’ ratings, and two have ‘Sell’ recommendations. Collectively, the analysts have a consensus price target of $88.25 per share, which is 0.13% below what the stock currently trades for. Atlantic Securities initiated coverage of the stock with a ‘Neutral’ rating on August 11, though it did assign a bullish $104 price target on it. 35 funds in our database were long Norfolk Southern Corp. (NYSE:NSC) at the end of the first quarter, up by three funds from the end of the previous quarter.
We’ll check out three more railroad stocks favored by the hedge fund industry on the next page.