What are we looking for?
U.S.-listed railway stocks that have low debt, strong long-term earnings estimates and pay solid dividends.
After a strong rally in February and March, the U.S. markets have cooled significantly with the past month being tough for most stocks. In the past four weeks, every sector of the U.S. market has been negative, with the exception of health care and utilities. Some sectors, such as cyclical consumer goods, are now down more than 4 per cent. During this period, one of the stronger sectors has been industrials. Within this sector, the railway industry has been particularly strong, up 4.2 per cent in the past month.
The screen
We will be using Recognia Strategy Builder in our search of U.S. railway stocks. We begin by setting a minimum market cap threshold of $5-billion (U.S.) to filter out all but the largest companies in the sector. Next, we will set a limit of 1.0 for the debt-to-equity ratio. We prefer companies with lower debt levels as debt is a drag on future earnings growth, particularly in an environment of increasing interest rates.
We are also looking for companies that have strong projected earnings growth rates based on analyst estimates with five-year EPS growth rates of 5 per cent a year or more. Finally, we will filter on companies with 13-week price performance of 2 per cent or better.
More about Recognia
Recognia is a global leader in automated quantitative analysis and engagement solutions for retail online brokers and institutions. Recognia's product suite provides actionable trading ideas based on technical and fundamental research covering stocks, ETFs, indexes, forex, options and commodities.
What did we find?
Kansas City Southern Industries Inc. is the parent company of Kansas City Southern Railway. Kansas City Southern is currently the smallest of the North American railway companies with routes that run mainly north to south linking Canada to Mexico. Despite its smaller size, this stock is tied for best projected EPS growth rate at 10.6 per cent and has the highest 13-week price performance, up 15.2 per cent in the past quarter.
Norfolk, Va.-based Norfolk Southern Corp. also has a very strong 13-week performance, currently up 12.7 per cent. On April 22, the company reported first-quarter earnings that easily beat analyst estimates. The company's shares surged over 10 per cent in a single day based on this news. Since then, the stock has fallen back slightly. Norfolk Southern is also tied for the highest dividend yield on our list at 2.8 per cent.
One very familiar domestic carrier appears on our list: Canadian National Railway Co. After achieving a new 52-week high on April 22, the stock has fallen back about 12 per cent after issuing cautious guidance as part of its first-quarter earnings. The stock is still up 2.7 per cent over the past quarter.
The investment ideas presented here are for information only. They do not constitute advice or a recommendation by Recognia Inc. in respect of the investment in financial instruments.
Investors should conduct further research before investing.
Peter Ashton is vice-president of retail and self-directed investing at Recognia Inc.