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Union Pacific is One Train You'll Want to Catch

The Action Alerts Plus team sees a clear track ahead for railroad operator as supply chain issues continue.

Trains. Yes, Trains.

If we told you to invest in railroads, would you listen?

Yes, this may sound odd, if not anachronistic, but it’s happening

“Buckle up and get ready for a nice, smooth ride on the UNP Express," the Action Alerts Plus team wrote recently. “The chart of Union Pacific (UNP) is magnificent, with higher highs and higher lows. One could get caught up in the overbought condition here, but that is where it might be premature to get bearish. Indeed, momentum is very strong, and if the market holds up we'll see the best names get the money. UNP would be in that category.”

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The thing that many investors may forget about railroads – at least in the United States -- is that they are primarily for moving freight. Most people think of passenger services such as Amtrak or even their local subway line, if they think about rail at all. But such services are not profitable and haven’t been in decades.

On the other hand, companies that use their rail networks for shipping and logistics can do very well for themselves. American railroad companies move an enormous amount of the country’s durable goods. One estimate by the Department of Transportation suggests that rail lines account for more than 28 percent of all shipping around the country. That is a staggering amount of business, one which generates more than $80 billion in revenue each year.

It’s also one of the few industries which has actively profited from global supply chain disruptions. To understand that, it’s important to remember that most of these disruptions have to do with increased volume. Shipping companies are moving more products than ever before, but a surge in durable goods purchases over the past few years means more demand for shipping than space available. That has pushed prices higher and left products waiting for the next available plane, train or truck.

This means good things for logistics and shipping companies, and it’s one reason why the AAP wrote “we like UNP here; it's one of our best names, a ‘buy on the dip’ stock.”

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