China Demand Boosts the Case for Railroads

Is it time to circle back to the rails now that the Baltic Freight Index is picking up? I am wondering if that isn't the case, given that some of the key commodities to be hauled, fertilizer, coal and steel, could have bottomed or are bottoming because of potential Chinese demand.

I had been worried about two things with the rails: the businesses themselves, obviously dependent to some degree on autos, and the stocks themselves. When you have a 9 million car sale pace, down from 16 million, your rail business is going to get hurt. When you have hedge funds puking up stocks on redemptions, you want to steer clear of the rails, because they are heavily hedge-fund owned.

Now, we put together some smooth hedge-fund performance, as we apparently got in January, and an end of what we thought was the endless cycle of redemptions, with the possible pickup in China traffic -- admittedly as one-way as it is, because I do not see us taking more Chinese goods and shipping them nationwide -- and you can make a case for the rails.

I have always liked CSX (CSX - commentary - Cramer's Take), which is heavily into fertilizer. But maybe it is time for Norfolk Southern (NSC - commentary - Cramer's Take) which has a 3.5% yield and plenty of coal. (Good story on Bloomberg this morning about how China is way short power.) From the looks of today's action, we may have something going already, but the stocks are so way down, I think it's OK to pay up for some and then "hope" they come down when the crummy unemployment number gets posted.

Oh, and if it isn't crummy, you might have a real launching pad on your hands.

Random musings: Remember as Goldman Sachs (GS - commentary - Cramer's Take) goes above its book value of $88, it is worth it for Goldman to do an equity offering to replace TARP money. TARP money can only be replaced by additional new capital.

At the time of publication, Cramer had no positions in stocks mentioned.

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Know What You Own: Other rail stocks include Burlington Northern Santa Fe (BNI - commentary - Cramer's Take), Union Pacific (UNP - commentary - Cramer's Take), Canadian National Railway (CNI - commentary - Cramer's Take) and Guangshen Railway (GSH - commentary - Cramer's Take).

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