“The New Silk Road” Motley Fool

By Travis Johnson, Stock Gumshoe, October 23, 2008

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!

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32 Comments on "“The New Silk Road” Motley Fool"

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A. Nony Mouse
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A. Nony Mouse
October 23, 2008 7:26 am

By a strange co-incidence, this appeared in today’s “Seeking Alpha”. by FP Trading Desk.

http://seekingalpha.com/article/101203-canadian-national-railway-co-breeds-bullish-forecast?source=email

boband
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boband
October 23, 2008 9:19 am
I heard a presentation a year or so ago on container shipping…and the CN route via Prince Rupert to Chicago and points south/east could be a winner (3-5 days shorter than any other route). That’s future. In the present there is a lot of commodity moving still, people still eat wheat, animals and people eat the corn, coal goes out for electrical generation, etc. So shipping volumes may not go down as much as one might think given a recession. Rates will be under pressure no doubt, especially for manufactured goods. So…CN may be a good long term investment…I don’t… Read more »
sequential
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sequential
October 23, 2008 1:05 pm

Travis
Please note Prince Rupert has been a Port for about 100 years it did not just open it got upgraded to beable to take larger cargo vessels, by the way have you figured out that Eastern Europen EFT that pays A 24.5% dividend yet?

mike f
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mike f
October 23, 2008 1:54 pm
October 23, 2008 Dear S&A Digest Reader, As you’ve probably heard by now – one of our associates recently came across a remarkable trading secret… the best we’ve seen in 9 years in the business. Unfortunately, we regret to tell you that he’s pulling the special offer he made to share it with our subscribers. After this Monday, you can’t get in. If you haven’t yet heard of our associate, James Castle – or the opportunity that he shares below – I urge you to have a look before his offer expires. Sincerely, Brian Hunt Editor in Chief, S&A Investment… Read more »
sequential
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sequential
October 23, 2008 3:10 pm

Well guys has any one tried this service or is it just a lot of hot air like most of them Ihave heard that IAN COPPER’S opptions trading pit has a good record
S

Richard E. Lowman
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October 23, 2008 3:25 pm

Does any one know any thing about “Free Emergency Retirement Recovery Series” teased by Chris Mayers, Capital and CRISIS, AGORA fINANCIAL ??

Charly
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Charly
October 23, 2008 4:38 pm

Hi Travis & all,

This is not the 1st time that the Fools have pumped CNI – I remember they came out with a similar spiel earlier this year sometime in Q1 … and yes they are EXTREMELY windy. So much so that their missives are now directed immediately to my junk folder. Who can actually read through (let alone pay for) that endless drivel more than twice ? Teaser? Taser would be more appropriate. And that reminds me, thanks for your refreshing & considered commentaries – it’s always good to read quality.
All the best – Charly.

trevor peasland
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trevor peasland
October 23, 2008 5:31 pm
I’ve held CNR for years but sold out before the last drop. I’d buy it back in a moment, but not until this latest craziness is over. Yes, people still need wheat, coal, etc. but the problem is the financial situation in that shippers cannot get guarantees of receiving there money because of a lack of interim financing. Prince Rupert was basically a fishing port until the recent building of the container terminal. As far as I know the Chinese shipping giant COSCO is the only company bringing goods into the port. CNR has newly double tracked from Prince George… Read more »
Jack
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Jack
October 23, 2008 5:40 pm

I love this stuff. Let’s take a fairly routine type company recomendation, and apply our misleading marketing keerap to it to drum up business. un-friggin believable. If these dudes actually picked good stocks they wouldn’t have to resort to the BS marketing tactics to sell there newsletter.

destry
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destry
October 24, 2008 12:00 am
mikef; Whatever your motivation…Kindly don’t do that again….If you are too lazy to verbally offer a viewpoint; At least have the common courtesy not to subject us (Me,really,as I have no right to speak for anyone), to a juvenile cut and past rendition of a letter tease…Reference the site, if you can, and have done with it… Good thing it wasn’t 20 pages, you probably would have pasted that! I did, in fact, send a letter of complaint over that garbage, to them…Actually the one that got me, I think, called us idiots…Or something equally insulting…If I want to pay… Read more »
KRL
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KRL
October 24, 2008 7:59 am

Invest in good companies for the long haul.*

The Fools have it more right than most of the rest.

Benjamin Graham, Warren Buffett and Philip Fisher’s track records speak for themselves.

*pun intended

George
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George
October 24, 2008 7:15 pm
Just because I’m old enough to remember the Santa Fe Super Chief trains, my emotional preference is for BNSF (even if they have to play 2nd fiddle to Burlington Northern…), but CNI sounds solid. As for MF Stock Advisor service, I agree it was generally good, but then again they recommended Jet Blue as one of their great “picks” as the next Starbucks, or something like that… They gentlemen (and ladies!) are sincere, but they’re just plugging their services like everyone else – at least I give them credit for doing it electronically instead of cluttering my mailbox like all… Read more »
Robert Brown
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Robert Brown
October 25, 2008 10:49 am
Hello: CNI is trying to purchase a small railroad system which bypasses the City of Chicago. There is alot of screaming going on since most of this systems crossing are at ground level and the increased volume will creat major traffic problems. Some of these crossing are main routes between northern Indiana and Illinois and would cause major traffic jams or increased traffic moving to the Borman Expressway. This expressway already experiences very heavy truck traffic at all hours of the day and is a major artery across northern Indiana. Often it is closed due to flooding and the traffic… Read more »
Karl A
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December 8, 2008 3:06 pm

The CN line is doing well, I can see it across the lake from me in Smithers BC getting more traffic with the port in Prince Rupert now open for containers. CN is a rather passive buy though, I would focus more on the mining companies along the lines such as Novagold (NG.to) (or whomever buys them out)or real estate development projects in the regions. Watch out Seattle/San Fran!

david
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December 9, 2008 11:43 am

With T. Boone asking for government assistance with electrical lines and Obama promising to help alt. energy would rail road right of ways be an effecient pre-cut place to install new electric lines and fiber? Just a thought and perhaps an additional source of income for rails with east west property thru the solar/wind belts.

who noze
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who noze
December 10, 2008 8:32 am

update on solomon [solm] 500,000 developmnt transmission operation foe the us gov. they expect further orders after project is completed bad news stock is in mills

vimax
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January 22, 2011 3:09 am

Where there is great love, there are always wishes.

Gravity Switch
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October 23, 2008 8:13 am

Thanks Mouse. The article quotes a couple analyst upgrades after earnings and calls CNI the “low cost producer”, which usually helps in weathering downturns.

Gravity Switch
Admin
11
October 23, 2008 1:11 pm

Thanks! The East European ETF I don’t think I’ve written about, partly because it was getting pummeled, but I’ll pull up that info and see if it’s worth a few minutes.

Jack
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Jack
October 23, 2008 5:50 pm

what’s the deal with posting this pathetic example of marketed drivel.
“i’m rich and your not”
“and i couldn’t care less about you”
“i’m James Castle the great”

Ha Ha

Ya, well that sure makes me want to subscribe! What a complete moron.

Jack
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Jack
October 23, 2008 5:51 pm

what’s the deal with posting this pathetic example of marketed drivel.
“i’m rich and your not”
“and i couldn’t care less about you”
“i’m James Castle the great”

Ha Ha

Ya, well that sure makes me want to subscribe! What a complete moron.

Jack
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Jack
October 23, 2008 5:52 pm

comment was intended for post 4 above

Big Mo
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Big Mo
October 23, 2008 7:51 pm

I agree. James Castle needs to keep his moat shut. If he’s so rich, why is he begging for our money? AND the way he insults the reader, he knows little (if anything) about marketing. My guess is he probably knows little about investing, too.
I take enough crap off of people when I’m earning my money. I don’t need to take it off of people when I’m spending my money.

Tease This
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Tease This
October 28, 2008 10:26 am

Those that can, Do. Those that can’t, TEACH! He’s “rich” because he sells his crap to “suckers like you”, but he’s not as rich as he claims. He’s wishing and dreaming that enuff of you will bite his teaser and pay him. That’s how he gets “rich”!

rich roddy
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October 23, 2008 8:03 pm
took the service for a year. i put the kiss of death on it. couldn’t afford to buy every week, and of course when i could that’s when it went down. a lot of his picks are already past the “buy up to” price when you get the letter, unless you sit in front of a computer all the time and wait for the e-mail. you can wait a day or two for the reco to start coming back down a bit into the buy range, but then it usually keeps on going. he may be doing a lot better… Read more »
destry
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destry
October 24, 2008 12:04 am

Yes, Richard,
I signed up for that…It wasn’t bad…
The first part was interesting…The last little part was promotional. I don’t have a problem with that. They had some trouble…Too many accessing crashed their site. Did a redo…

Gravity Switch
Admin
11
October 24, 2008 8:19 am

I generally agree with you, though sticking with the long haul can be extremely hard when the short haul is painful and sharp. Especially on a day like this that brings us more talk of “capitulation” — as if anyone really knows when the selling will be done.

destry
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destry
October 24, 2008 4:27 pm

Travis,
From what I’m surmizing from all the experts I’ve
listened to; This deleveraging could drag on to year’s end…The person who added to that theory,also opined that before it was over, 25% of hedge funds would be gone…They are the major
flies in the buttermilk here. They have to dump stocks to meet margin calls and redemptions…
They even try to plan the liquidations to do themselves the most good…as dumpers….Guess
who are the Dumpees…

Chris G
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October 25, 2008 12:32 pm

Just go to etfconnect.com and search by yield or type – you’ll find that ETF in 10 min or less…

Chris

Blurpie
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Blurpie
January 29, 2009 9:12 pm

RNE, isn’t it? LOL, it’s sporting no less than a 206% yield according to Yahoo Finance.

Gravity Switch
Admin
11
December 9, 2008 11:46 am

no idea … but I like your thinking!

Deak
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Deak
January 18, 2009 7:59 am

I own CNI and have followed for last two years, snag over gov approval of E & J purchase I believe held stock price down recently. Daily Southtown news has been following closely. Intermodal is the low cost future of shipping and it looks like they are putting the company in a good position.

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