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Published: October 19, 2010
If you were asked
to name the types of stocks with the greatest appreciation
potential, which sectors would come to mind: tech, energy,
financial services, health care? Investors flock to those and
other well-known industries for good reason. They all have a
history of good long-term stock performance.
Following the crowd has a downside, though. Popular assets can
be more prone to bubbles like the one in real estate a couple
years ago or the one that arguably exists in gold right now.
When bubbles burst, as they often do, investors lose lots of
money fast.
That's why I'm a fan of diversifying into areas that are
less-traveled but can still offer performance. One low-key
sector in particular has been doing beautifully, spiking about
+140% from a March 2009 bottom.
I wouldn't necessarily expect results like that going forward,
especially from the industry as a whole. But as the economy
slowly picks up steam, certain stocks in the sector are apt to
pull ahead. I'm talking about railroad stocks, and the right
ones could deliver double or even triple-digit gains in the next
few years due to rising freight demand. Here are several to
consider.
Kansas City Southern (NYSE: KSU). Shares of this company
currently trade at about $41.25. However, based on forecasted
earnings growth averaging nearly +16% annually, they could rise
into the $70 to $80 range -- a +70% to +90% jump -- within a few
years.
Because coal-fired power plants no longer keep large coal
stockpiles, regular shipments to such plants will be an
important source of Kansas City Southern's future earnings.
Another important source will be service additions, like a new
line in southeastern Texas (which should make the company more
competitive with truckers in that area) and an exclusive
franchise to serve the west Mexican Port of Lazaro Cardenas, the
largest seaport in Mexico.
Also, following a two-month service interruption, an existing
revenue source is once again operational: the company's rail
system in northeastern Mexico, which suffered severe flood
damage during hurricane Alex this past summer.
Norfolk Southern (NYSE: NSC). Return projections for
Norfolk Southern aren't quite as attractive as those for Kansas
City Southern, but they're certainly worth a look. From the
current price of about $62, the stock could conceivably trade in
the $100 to $110 range in a few years -- an increase of +60% to
+75%. The stock currently sports a decent 2.4%
dividend yield, though that may gradually drop to less than
2% as shares appreciate.
Norfolk Southern is promising
because freight shipments have been up, rising +22% in the
second quarter, for example, mainly on strong coal exports. The
Heartland Corridor, a new line resulting from a partnership with
three states and the federal government, improves efficiency
greatly by knocking a full day off a key route between the Port
of Norfolk and the Ohio Valley.
An important variable: the board of directors authorized the
repurchase of 50 million of Norfolk Southern's 370 million
outstanding shares through 2014. If the company is as
proactive about buybacks as it has been in the past, its stock
could rise much more than I've described here.
RailAmerica (NYSE: RA). Whereas I consider Kansas City
Southern and Norfolk Southern surer investments with very good
appreciation prospects, I see RailAmerica as a riskier stock
with triple-digit potential. In a few years, its shares may well
be trading +95% to +140% higher than their current price of
about $10.20.
That's because RailAmerica has been vastly expanding capacity
and increasing freight traffic. Plus, it serves several ports
and has connections to Asia, where there's high demand for all
sorts of products. It recently bought Atlas Railroad
Construction, which should greatly facilitate its own expansion
efforts.
As you may realize when looking up the stock in your own
research, though, RailAmerica is a small-cap company -- which
usually means more risk. And its stock hasn't even been trading
for very long, either (since 2008).
Action to Take --> Consider
adding railroad stocks to your portfolio. Although they're not
known for it, many have excellent appreciation potential.
Provided the economy cooperates, and I think it will, chances
are that potential will be realized.
Railroad stocks can also reduce overall risk in your portfolio
through diversification. When was the last time you heard about
a railroad bubble?
-- Tim Begany
Contributor
StreetAuthority |
