Tuesday, July 21, 2009

Buffett's Railroads Revisited

Last year about this time, one of the big buzzes in the investment community was Warren Buffett's aggressive buying of the railroad stocks. Everyone was scratching their heads over this until they began seeing some neat things about the old stoggy rails.

For one thing, perhaps the biggest thing, the escalating price of oil puts some aces in the hands of the rails. Trains can move tonnage using only about 1/4 th the fuel it takes to split the load up on trucks and put them in stop and go traffic. The end of cheap oil has also placed more of a premium on coal, and the rails move the vast majority of coal. Also, ethanol can not be shipped in our conventional pipeline system, so the aggressive mandated ethanol production growth curve works in favor of rail tanker cars. As we must dig, scrape, grow, and haul our oil instead of piping it, the rails will expand into the role of energy supply.

One of the things Buffett likes about the rails is the high barrier to entry into this business. It's hard to start up a big rail line. As more want in, the few established lines can ride the gravy train all by themselves. No dilution of the profits among a flood of upstarts as with a hot new tech toy.

Well, that was last year. The rail stocks started to climb, then were demolished along with all investments. But the facts haven't changed. So the rail stocks are now a very good way to participate in a recovery. Right now they are doing some nice breakout moves like CSX:

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