Bolling: All Aboard the Rails Trade

Don't miss your train, it's departing.

After many attempts, Gold finally hit a record last week in London. It was a result of frenetic buying coming from everywhere. There was big buying in the U.S. and Europe, surprising even some longtime fans of Gold. You know, I have loved and recommended gold for years. This time the world brought Gold to a record that surprised some but not me.

This week, I talked on Fox's Bulls & Bears TV show about a trade that makes a ton of sense to me. With the recent high cost of fuel, the railroads have become the shipping method of choice. It has been a favorite space of Warren Buffett. He has amassed an 18% stake in Burlington Northern(BNI).

One of the main reasons the rails are prospering now is because diesel fuel has risen faster than oil, gasoline and jet fuel. The national average diesel price topped out recently at $4.85 a gallon, up a whopping 67% vs. last year. It still sits at $4.68 per gallon today.

In an interesting coincidence (some say there are no coincidences in life), the cover story on Barron's this week, appearing on newsstands simultaneous with my Bulls & Bears recommendation, was on the bright investment future for the rail stocks. In it, Barron's suggests that locomotives haul a ton of freight 400 miles on a gallon of fuel. That's three times as far as a truck.

I take what I say on that show very seriously just as I take extreme care in the ideas brought forth in this column. I have a ton of fun on the show, but trust me, the content is well researched and only ideas I believe in are brought to the table.

The new locomotives in use now are both more fuel efficient than their trucking competitors and more environmentally friendly. While you may have images of a coal-burning locomotive belching out black smoke from decades-old photos, the modern locomotive diesel engines run quieter, cleaner and more fuel-efficient than trucks and sea-born vessels.

I talked about Norfolk Southern Railroad(NSC) on Saturday morning as Barron's hit the stands. I always love it when my ideas are backed up by smart guys like the analysts and columnists at Barron's. My reason for calling NSC rather than the Buffett favorite BNI can be summed up in one word: coal.

More than 35% of NSC's haul volume is coal. I have been following NSC for many years, and one thing jumps out at me every time I renew my research: NSC has been a big player in the East Coast coal transport business.

While some of the other rails have suffered some due to their exposures to plywood (volume dropping due to a housing crisis) or auto (deliveries dropping due to a credit crisis), NSC seems to be weathering those storms by maintaining its relationships with the coal mines and utilities.

Another relevant point to consider is that many rail contracts are set for the future. In a world of uncertain oil prices, shippers of goods are lining up to set rates for future shipments. Let's take that theory one step further. If oil prices -- and therefore diesel prices -- drop, a perfect world has arisen for the railroads. With their contracts signed and lower fuel prices, top line and bottom line results would improve. Alternately, if fuel continues to rise, the world gets brighter for the BNIs, NSCs and CNIs of the world at the expense of the trucking industry.

With a fair and mid-range forward price-to-earnings ratio of 17, Norfolk Southern traded last at $73.64 in New York. That's just $1.89 from its 52-week high. I think this freight train of a trade has wheels left on it. NSC should test the $90 level if things play out as outlined above. A stop-loss should be placed in case this stock falls below $62.50. That would create a 15% risk objective vs. a 22% profit objective.

The bottom line is that the rails are quickly re-emerging as growth plays after decades of flat top- and bottom-line results. Thank a high fuel price, a high coal price, high grain prices, and a ridiculous ethanol mandate from our people in Washington.

By the way, I hope you did realize that the Gold I mentioned above was the ABBA Greatest Hits Album released in 1972. It hit No. 1 on the the U.K. charts last week, making it the oldest album ever to hit No. 1 there. I know you weren't thinking that I lost it ... that gold is $131.30 from its record high ... that Bolling is wrong and you were about to email Cramer. I still like the yellow metal, however.

Trade with your head, not over it.

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