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Railroad Stocks Could Be on Fast Track

Analyst Matthew Troy's name was misspelled in an earlier verison of this article.

NEW YORK ( TheStreet) -- Bullish days could lie ahead in both the near- and long-term for the publicly traded railroad operators, thanks in part to some heady investments and a little bit of luck.

The rail industry has seen the increased prevalence of intermodal shipping and gains in domestic exports of coal over the past few months, two trends that bode well for stocks in the sector.
Guangshen was among this week's railroad winners.

"[There is] a very big sector of traffic that currently moves by truck that could move by intermodal rail," said Daniel Keen, assistant vice president in policy and economics at the Association of American Railroads, or AAR. "Absolutely no question that railroads... do see intermodal as a potential growth market."

The term "intermodal" refers to containers that are shipped via more than one mode of transportation: i.e. from ship to truck to train.

As it stands, there are laws in place that limit the distances trains can travel to ship freight containers. Whatever distance remains between the train hub and the final destination must be shipped by a truck. A lot of companies in the past decided to forego intermodal to instead ship goods completely by truck or by plane.

But rising oil costs have left businesses strapped for cash, which means intermodal has become a cheap alternative.

One notable company that moved to intermodal in January was FedEx Freight (FDX - Get Report), which announced at the start of the year that it would use intermodal for the first time. The shipping company said the decision was for a new "economy" service.

One reason for this choice has been improved track infrastructure which has made a serious dent in railroad shipping cost and enticed companies to save a few dollars by using trains instead of gas-guzzling semis.

The rail companies have spent billions of dollars on infrastructure to eliminate low overhanging structures. Low overhangs had prevented double stacked trains from traveling on certain lines; if a train cannot double stack, it ships less containers, which drives up costs. The alternative was to ship containers along the same line by truck. Railroads have significantly curbed this problem, which has given their customers an economical substitute.
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