Market Overview

These Three Railroad Stocks Look Great

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Back in early October, I mentioned that some railroad stocks would be some of the biggest winners of the Bakken oil play in North Dakota and Montana and the tar sands in Alberta. My position still holds true today.

Since last discussing pipeline and railroad stocks, Canadian National Railway Company (NYSE: CNI) has seen its share price climb more than 10%. Meanwhile, Canadian Pacific Railway Limited (NYSE: CP) is up more than 15% and Union Pacific Corporation (NYSE/UNP) has increased 14%.

Of the oil and gas pipeline stocks I mentioned, Magellan Midstream Partners L.P. (NYSE: MMP) is up more than 15%, while Energy Transfer Equity, L.P. (NYSE: ETE) has soared almost 26%.

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While a new pipeline was recently completed in the Bakken oil fields in North Dakota, thanks to a dithering President Obama, North American oil production continues to outpace oil pipeline capacity. That’s a boon for both oil pipeline stocks and railroad stocks.

After dragging his heels for five years, President Obama has still yet to render a decision on the Keystone XL pipeline that would connect Canada to Texas. Obama’s delay is nothing but good news for railroad stocks. Unlike a pipeline, the joy of sending oil and gas by railroad is that it requires no approval by the U.S. Department of State.

Regardless of what President Obama decides, oil and gas will continue to flow south, whether it’s through existing pipelines or by railroad stocks. And increasingly, it’s being sent by rail.

For the week ended January 18, U.S. railroad traffic increased 4.5% year-over-year. Petroleum and petroleum product carloads increased 13.3% year-over-year. In Canada, shipments of Canadian crude oil by railroad stocks have reached 175,000 barrels per day, compared to less than 24,000 barrels per day at the start of 2012. (Source: “AAR Reports Increased Weekly Rail Traffic,” Association of American Railroads web site, January 23, 2014.)

On the heels of the increased need for North American railroad stocks, Canadian Pacific announced record fourth-quarter and 2013 full-year financial results. Fourth-quarter net income soared to $82.0 million, or $0.47 per share, versus $15.0 million, or $0.08 per share, in the fourth quarter of 2012. Full-year net income was $875 million, or $4.96 per share, versus $484 million, or $2.79 per share, in 2012. For 2014, the company expects to report full-year revenue growth of six to seven percent and earnings-per-share (EPS) growth of 30%. (Source: “Canadian Pacific announces record fourth-quarter and 2013 full-year financial results,” Canadian Pacific Railway Limited web site, January 29, 2014.)

Union Pacific Corporation is another one of the railroad stocks that also reported record fourth-quarter and full-year results. Fourth-quarter net income jumped 20% year-over-year to $1.2 billion, or $2.55 per share; full-year net income climbed 12% to $4.4 billion, or $9.42 per diluted share. (Source: “Union Pacific Reports Best-Ever Quarterly and Full Year Results,” Union Pacific Corporation web site, January 23, 2014.)

For investors who happen to think we’ll continue to use oil and gas for the foreseeable future, oil pipeline stocks might be an alternative option to railroad stocks. With the squeeze on for more pipelines, energy infrastructure companies, such as Magellan Midstream, Energy Transfer Equity, or Targa Resources Partners LP (NYSE/NGLS), might be worth researching.

This article These Three Railroad Stocks Look Great was originally published at Daily Gains Letter

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