Sector Snap: Analyst Cuts 2 Rails To 'Sell'

NEW YORK (AP) — An analyst recommended investors get rid of a pair of railroad stocks Monday and urged caution on another, saying the sector's reputation for outperforming even in tough economic times might be tempered with tighter regulations and the possibility of a long, drawn out recovery.

Citi Investment Research analyst Matthew Troy cut shares of Burlington Northern Santa Fe Corp. and Canadian Pacific Railway Ltd. to "Sell" from "Hold," citing both stock's recent run-ups. Shares of Fort Worth, Texas-based Burlington have jumped by nearly a third since lows in March, and Canadian Pacific is currently trading better than the S&P 500 and the rest of the rail group, he noted.

And although Troy calls Burlington "one of the best run railroads," he said its earnings growth potential is less than its peers because of its remaining fuel contracts, high exposure to weakening export grain markets and slowing demand for U.S. coal.

Troy thinks Canadian Pacific will be hurt by weakness in its key fertilizer and coal businesses. This will drag down sales in a year when the rail is trying to improve its efficiency, fund its pension plan and improve its capital position, he said.