Take Your Profits in CSX Now

The railroad reports earnings Wednesday.
By Richard Saintvilus ,

CSX (CSX) - Get Report , the biggest railroad operator in the eastern U.S., will report second-quarter earnings results after the closing bell Wednesday. It's time to take your profits and go.

Why? While CSX is still on track to deliver gains in the second half of the year, it would be a mistake to hold its recent gains through the earnings report.

Railroads aren't very sexy, but CSX has been one of the better performers on the Dow Jones Transportation Average, gaining more than 8% over the past three months. But its chart suggests a pullback to 7% to 9% is imminent. Take a look at the chart below, courtesy of TradingView.

CSX trades around $27. The stock has risen 4.1% for the year to date compared with the 5.3% year-to-date rise in the S&P 500 (SPX) index. But the CSX 8% gains in three months have outperformed the 4.4% three-month rise in the S&P.

Fundamentally, CSX stock is still cheap, trading at forward price to earnings of 15.6, compared with P/E of 16.5 for the S&P 500 index. But CSX' fiscal 2016 earnings estimate of $1.73 per share calls for a year-over-year decline of 13.5%.

So despite the implied value by the relatively cheap P/E, the company's profits aren't growing, suggesting limited upside in the stock. From a technical perspective, the charts suggest CSX -- in the near term -- has reached is destination.

Based on Tuesday's close, the stock is firmly above its 20-day, 50-day and 100-day averages, which suggests there have been more buyers than sellers of the stock. The chart shows resistance is now at $27.05 -- the sixth time the stock has reached that level, breaking it once and failing the previous three times.

The last time CSX reached that level, the stock declined to $24.50, or 9% lower. With earnings projected to decline more than 13% this fiscal year, CSX would need to beat earnings and raise guidance to prevent the stock from falling.

That's a tall order, given that the company has missed analysts' revenue estimates in the past four quarters. Taking profits now and waiting for the pullback is the smarter play.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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