The folks at the Fool have issued another novel, this time in service of their Stock Advisor newsletter.
In a loooong sales letter, they’re offering up an investment idea that they call “The New Silk Road” that will, one hopes, bring riches to US investors in the same way that the original silk road built fortunes for generations past and connected East and West.
So what are Dave and Tom Gardner trying to sell us? What they’d like you to buy is a subscription to their Stock Advisor newsletter, which generally has done pretty well. You can subscribe if you want to.
But don’t subscribe just to find out what the name of their “new silk road” investment is. For that, you can count on your friendly neighborhood Stock Gumshoe to do some sleuthifyin’ and spill the beans.
“It crosses the continent east to west… and north to south. It even connects past American industrial dominance… to the present banking crisis… to our FUTURE.
“In a moment, you’ll discover how this unique network offers you SAFETY in a teetering market. And how it could also pour TONS OF MONEY into your account for 10 to 15 years. And get your nest egg back on track in as little as 36 months!”
Essentially what they’re telling us is that now is the time to invest in railroads — that’s what the “new silk road” is, a railroad.
And they’ve picked the one that they think is the best investment right now.
They provide, of course, plenty of jibber jabber that backs up their selling proposition …
“The “New Silk Road” I’m referring to is a RAILROAD. And if you knew that all along, you probably know the answer to this:
“Is it possible that one day you’ll wake up and discover the “New Silk Road” has 90% less track than advertised? Not a chance!
“And yet, their rock-solid base of assets is really just the beginning of the story…
“This is the ONLY RAILROAD to cross North America both east to west and north to south… providing their customers access to all 3 NAFTA nations…
“The ONLY RAILROAD into, and out of, the closest ports to Europe and China (both ports are deep, right next to open waters, and ice free year round). In fact, their route to China is the closest by 3 days — that amounts to one extra round-trip per year for cargo ships and tankers…
“It’s the ONLY RAILROAD with access to the deepest congestion-free harbor on North America’s East Coast… ”
Phew, and that’s just a tiny little taste! I generally like the folks at the Motley Fool, what little I know of them, but man oh man can their copywriters churn it out …
“According to the U.S. Chamber of Commerce, freight railroads will see an 88% increase in demand over the next quarter century…
“And we’re recommending a best-in-class railroad with SOLE CLAIM of connecting the 3 coasts of North America through 20,000 miles of track…
“The company is the operational leader in a business with tremendous start-up costs and high barriers to entry…”
Don’t worry — there’s plenty more! They point out the comparable efficiency of railroads over trucking:
“Here’s another unbeatable advantage — railroads are flat-out more fuel efficient than trucking…
“In fact, in 2007, major freight railroads in the U.S. moved a ton of freight an average of 436 miles on each gallon of fuel. That’s equal to moving a ton of freight from Baltimore to Boston on a SINGLE GALLON of diesel fuel. Which is more than a 3% increase over 2006… and an astonishing 85% improvement since 1980!
“And in this era of higher-and-higher-priced gasoline and diesel fuel, not only does the “New Silk Road” offer its customers a more fuel efficient way to ship goods… this company has tracks criss-crossing what is expected to become the biggest producing oil field on earth.”
That biggest producing field is the oil sands … and of course, the production of those reserves falls apart if oil gets too cheap, so most folks are trying to be awfully careful about relying on oil sands at the moment.
And finally, one more clue, they’ve got a profit margin of 26% …
So what’s our answer? We feed all that info, along with the exciting route map provided in the ad, and the Thinkolator fires up and tells us that the Motley Fool’s “New Silk Road” company is …
Canadian National Railway (CNI)
You might have guessed that after seeing all those references to “North America” instead of plain ‘ol “America,” but yes, Canadian National has one of the biggest route maps around — their big Asia trade port is Prince Rupert in British Columbia, which just opened last year, and the European trade port is probably Halifax, Nova Scotia (or maybe nearby St. John). They also have a route down the Mississippi to New Orleans and Mobile which gives access to Panama Canal routes, and they have had a marketing alliance with Kansas City Southern to provide access to Mexico (thus the access to all three NAFTA countries).
So, should you buy a railroad? I don’t know. Certainly they were excellent buys a few years ago in most cases, Warren Buffett was on board along with many others (though I should perhaps mention that Buffett and another Motley Fool newsletter have also been investing in Moody’s for years, and boy are those guys taking a beating here in DC today — nobody’s perfect!).
Here’s the simple explanation for why railroads were a hot pick a few years ago, and why they’ve fallen dramatically in recent months:
They are hugely more efficient than trucking, so when fuel costs are rising they look great.
They serve several markets that had massive runs in recent years — steel, coal, iron ore, corn and other grains, and container trade with Asia.
The other thing all those things have in common right now? They’re all moving in the other direction.
So today, buying a railroad is probably a bit of a contrarian play, which doesn’t by itself mean it’s necessarily good or bad. Rates are bound to come down, because diesel price cuts mean trucking rates will fall, and falling coal and oil and grain prices will mean those producers and customers might push for lower freight rates for those commodities. Add in troubles with some of the more marginal traffic, like newly constructed autos, and it would be reasonable to assume that demand for freight railroads might drop a bit in the near future.
Then again, these companies do have the most efficient land transportation method locked up, by a mile, and many of those commodities will still move, even if it’s at lower prices or in lower volume. And the U.S. has significantly underinvested in rail capacity for the last 50 years, as far as I can tell, so it’s not like there’s a lot of competition for the work of moving grain from the midwest to the Atlantic or Pacific ports.
Coincidentally, as I was typing just now I heard Jim Cramer on CNBC saying that he’s been advising folks to sell railroads and that he’s been thinking their shares should fall for some time, largely because they move coal, iron ore, steel, all the stuff that is collapsing in price or that seems destined to collapse in price if the economy continues to fall. If there are no buyers for this stuff, there’s no reason to ship it, and if there’s no reason to ship it, there’s no way that railroads can keep raising their rates. That’s not to say this is what’s going to happen in the long term, but it’s certainly the risk in the short term, at least. So if you think Cramer’s a contrarian indicator, there’s some fuel for your fire.
There is certainly some nice, bedrock feeling to a railroad stock — you can picture those solid rails and the big ol’ railroad ties, carrying mighty locomotives and long trains of hundreds and hundreds of hoppers full of coal, destined to dirty the skies over Beijing. All that stuff is real, and it will be here tomorrow and next year, and in the decades to come. And CNI does stand out as a very profitable railroad, the 26% profit margin number is accurate and impressive and stands above all the other big railroads (I don’t know why, haven’t looked into it).
All transports are cheap right now and, arguably, undervalued. The railroads have moved against many of the other ones (mostly truckers and airlines, though we can throw in bulk and container shippers, too) because railroads, unlike the others, tend to benefit from high oil prices, but all of them are subject to the cycles of the economy.
If you’re interested in Canadian National, one nice thing is that the competitors are few and far between so it’s pretty easy to research them all fairly quicly — there aren’t that many railroads left, and certainly very few large ones. The other big railroads on our fair continent are Burlington Northern (BNI), Norfolk Southern (NSC), Canadian Pacific (CP), Union Pacific (UNP) and CSX (CSX). BNI and UNP are the biggest ones in terms of market cap, NSC and CNI are slightly smaller and have the highest recent profit margins. The two Canadians have the lowest PE ratios in that group, though all are fairly close to their historic PE ratios over the last five years or so, as far as I can tell, with trailing PE ratios generally between 10-14.
Oh, and if you think Buffett has made his one big mistake with Moody’s and you’d rather follow his railroad investment than the Motley Fool’s, he’s been buying Burlington Northern Santa Fe over the past couple years — Berkshire Hathaway currently owns about 18% of BNI, and it’s one of Berkshire’s largest common stock investments (Berkshire also owns smaller pieces of Norfolk Southern and Union Pacific as of the second quarter 13F).
I’m stuck with a rental car right now that makes me feel like I’m at the helm of a locomotive (it’s a ridiculous tricked out Ford Expedition, the perfect vehicle for urban parallel parking), and the fact that I’m actually willing to fill it with gas and drive it tells you that trucking might be getting a bit more competitive with the rails again right now … assuming anyone even wants to buy grain from Illinois, or toys from China, or coal from Montana.
All the transports are moving South in a big hurry right now. So is CNI or any of the others a good idea for long term holders? A nice bottom-picking opportunity? Or are we looking at an overvalued pile of scrap and a very unfortunately-timed Motley Fool ad campaign? Let us know what you think!