Don't Play 'Follow the Billionaire' on Railroads By Richard Suttmeier RealMoney.com Contributor 5/17/2007 2:00 PM EDT

We know that a number of railroad stocks have been bought by Warren Buffett and other billionaires, but these were bought some time ago, perhaps when they were undervalued in January. As of today, the transportation sector is 18.4% overvalued, with the railroads 22.1% overvalued. The railroads also have a P/E ratio of 26.8, so they are clearly not cheap. Right now, the rails are trading on the momentum track, but you must be aware of their valuations.

However, I cannot deny that the Dow Transportation Average has the technical momentum to trade to another all-time high, as this average has yet to achieve my semiannual resistance at 5280 (see chart next page).

But given stretched valuations, traders must have an exit strategy, and investors must ignore the hype with regard to imitating billionaire investors. The fact is, according to fellow contributor James Altucher, you just don't know when and at what prices these purchases were made.

Burlington Northern (BNI) , CSX (CSX) , Norfolk Southern (NSC) and Union Pacific (unp) all have a buy rating according to ValuEngine, but each have either reached or exceeded their destinations known as risky levels. Let's take a closer look at each of these four.

Burlington Northern has a positive weekly chart profile and has been trading between $86.01 and $95.47 since April 9, with fair value at $83.80. With the stock 9.7% overvalued at Wednesday's close, investors should consider booking profits, as the stock is between my quarterly pivot at $90.16 and $95.47, which exceeds my $91.94 monthly risky level.

Traders riding this rail should consider protecting gains with a sell stop below a quarterly pivot at $90.89. BNI began the year with a low of $71.51 on Jan. 8, so in all likelihood, the billionaire buyers bought their stakes below my semiannual pivot at $82.41.

CSX has a positive weekly chart profile, but momentum has become overbought, with the stock 21.7% overvalued vs. fair value at $38.11. Whenever a stock becomes both overvalued and overbought, the long-term investor should consider booking profits, and the range within which to do so for CSX is between my monthly pivot at $45.24 and the May 9 high of $47.38.

Traders on this locomotive should consider protecting gains with a sell stop below $45.24. CSX began the year with a low of $33.50 on Jan. 10, which gave the billionaires the opportunity to buy below my semiannual pivot at $34.85. My quarterly pivot at $42.02 was taken out to the upside on April 9.

Norfolk Southern has a positive weekly chart profile and is trading at a new all-time high today. The stock was 10.8% overvalued at Wednesday's close vs. fair value at $51.23. Investors and traders should consider booking profits with a sell stop below my monthly pivot at $57.34. A lower semiannual pivot is $54.49. NSC traded as low as $45.38 on March 5, staying above my semiannual value level at $44.37.

Union Pacific has a positive weekly chart profile, but momentum has become overbought with the stock 29.1% overvalued at Wednesday's close vs. fair value at $92.49. The stock is trading to an all-time high today.

Whenever a stock becomes both overvalued and overbought, the long-term investor should consider booking profits, and the way to protect gains is considering a sell stop below my monthly pivot at $117.61. This is the same strategy that short-term traders should consider.

UNP began the year with a low of $89.58 on Jan. 10, which gave the billionaires the opportunity to buy below my annual and semiannual pivots at $91.07 and $90.46. My quarterly pivot at $105.06 was taken out to the upside on April 9.

Dow Jones Transportation Average

Source: Reuters

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At time of publication, Suttmeier had no positions in any of the stocks mentioned in this column.

Richard Suttmeier is the chief market strategist for RightSide.com, where he writes the Small Stocks and Sector Report. Early in his career, he became the first long bond trader for Bache and later began the government bond department at LF Rothschild. Suttmeier went on to form Global Market Consultants as an independent third-party research provider, producing reports covering the U.S. capital markets. He has also been the U.S. Treasury strategist for Smith Barney and chief financial strategist for William R. Hough. Suttmeier holds a bachelor's degree from the Georgia Institute of Technology and a master's degree from Polytechnic University. He appreciates your feedback; click here to email him.

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