Railways Pool

The transportation sector of the United States economy is composed of nine industrial groups. One particular group moves more volume of tonnage based on ton miles than any other form of transportation – railroads. In accordance with the Federal Department of Transportation, railroads move 39.5% of all freight in the US (based on ton miles which is the length freight travels). It’s a $60 Billion industry with over 140,000 miles of track. It is dominated by seven major carriers (referred to as Class I Railways). Six of these carriers are publicly traded. The seventh is owned by Berkshire Hathaway. A recent announcement by Canadian Pacific Railroad to merge with Kansas City Southern will consolidate this railways pool to five potential investments in the third quarter of this calendar year 2021.

The key to success with this pool is determining intrinsic value. This is one of the few times that the discounted cash flows method is warranted in the intrinsic value formula. Once calculated, given the high stability of earnings, the intrinsic value is adjusted annually about four to five percent higher depending on financial and actual performance in accordance with each railroad’s key performance indicators.

The following articles articulate this railways pool of investments and provide all the decision model justifications, formulas, changes and reasoning for the respective buy/sell model. You must be a member of the Value Investment Club in order to access the respective articles and the buy/sell model. Click here to join: Membership.

Currently, late April of 2021, all the railroad stocks are performing at new historical highs. This has been the case now for almost five months. Historical analysis of railway stocks identifies that they are highly correlated with the overall economy which makes sense given their strong relationship to movement of freight. Thus, in order to have an opportunity to buy, the major indices must have retrenchment of some significant percentage, typically more that 15%. This is when opportunities to buy will come to fruition. Until then, a value investor can only wait.

The following graph illustrates the performance of the railways pool during the first year. In effect, this pool outperformed the market by a factor of 3.5. Furthermore, it was able to achieve this with only FIVE full cycle transactions.

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Railroad Fund – Update 02/26/2020 Coronavirus Impact
I noticed that Union Pacific (I consider Union Pacific the highest quality stock within the six Class I railways of the railroad fund) is now at $165.00 even. A 17% drop is the requirement for me to buy; see my article: Union Pacific - Buy/Sell Model.
Railroad Fund – Update 02/27/2020 Purchased Union Pacific
In yesterday's post, I indicated that if Union Pacific's share price drops to $156.79 that the fund would use its excess cash to purchase shares.
Key Performance Indicators in the Railroad Industry
There are six Class 1 Railways traded in the US market. If you look at each railway's respective annual and quarterly filings, all of them report certain key performance indicators (KPIs).
56.67% Return on Investment: Union Pacific Railroad
Value investing is a principle of investing whereby the investor uses ratios and comparative analysis of similar investments over an extended period of time. In this case, I compared the six publicly traded Class I railways in the United States. Then based on the results, I exercise buy and sell points for each stock within the fund. In this case, Union Pacific Railroad's prior peak (high selling price) was $188.96.
Railroad Fund Balance 06/30/2020
49.060606 Shares of Norfolk Southern Corporation - Closes at $175.82/Share FMV = $8,625.84 (Avg Buy Price/Share = $203.83 for Basis of $10,000.00) Cash Position including recent dividend payment from NSC = $1,555.16 Total Fund Balance = $10,181.00 FMV Gain as a % Since Inception: = 1.81%
Railroad Fund Status July 31, 2020
Railroad stock offers good upside potential with very little risk involved. This particular railroad fund is outperforming the DOW Jones Industrial Average by a factor of three.
Sold 49.060606 Shares of Norfolk Southern Railroad for a 14.97% Annual Gain
On 09/14/2020, Norfolk Southern Railroad's price hit $220.13 at opening. I set my sell point via an automatic sell at $219.88 and thus the shares automatically sold at $220.13.
Sold PUTS on Railroad Stocks
Today, I sold 59 PUT options for Union Pacific with a strike price of $170.00 with a final date of February 19, 2021. PUTs are simply selling insurance that if the stock price drops to $170 per share, the Value Investment Fund will have to buy them from the owner of the puts.
Purchased 98.2849 Shares of Norfolk Southern
This morning at the market opening, the railways pool of the Value Investment Fund purchased 98.2849 shares of Norfolk Southern at $202.49. Altogether, including transaction fees of $1 per share, the fund invested $20,000.
Purchased 114.9557 Shares of Union Pacific
From the Lessons Learned article posted a few days ago, in order to gain higher returns, the investment model needs to have greater dispersion with my buy/sell trigger points in its model. Last year, the buy/sell triggers for Union Pacific were a 17% market price decrease from the prior peak and to sell at 100% of prior peak. This purchase point is driven by the model update whereby market price decreases must hit 18% decrease and the sell point increases to 102% of the prior peak price. This post covers the model update and the associated dollar amounts tied to Union Pacific.