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Rail Stock Divergence

July 21, 2011 By Jeremy Jones, CFA

The Association of American Railroads (AAR) put out its weekly rail traffic report today. For the week ending July 16, total carloads fell 0.3% compared to the same week last year. The AAR’s weekly rail traffic data is famously noisy. To get a better read on the underlying trend in rail traffic, it is useful to adjust the data. In the first chart below, you are looking at the year-to-year rate of change of the 13-week moving average in both total carloads and cyclical carloads. Both series have dipped into negative territory. The next chart shows the four-week moving average of total carloads for each of the last four years. Rail traffic is now tracking below levels a year ago and far below 2008 levels. That’s not a bullish signal for economic growth.

What isn’t tracking below 2008 levels is the S&P 500 Railroad index. Railroad stocks surpassed their 2008 highs in October of last year and have advanced 25% since. Union Pacific led the group higher today when it reported better-than-expected earnings. Why are rail shares advancing to new all-time highs when volume is still below 2008 levels? One big reason is pricing. The Producer Price Index for rail freight transportation is up almost 10% over the last year and over 60% since year-end 2003. If you are looking for an industry with pricing power, the rails have it.

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Jeremy Jones, CFA
Jeremy Jones, CFA, CFP® is the Director of Research at Young Research & Publishing Inc., and the Chief Investment Officer at Richard C. Young & Co., Ltd. Richard C. Young & Co., Ltd. was ranked #5 in CNBC's 2021 Financial Advisor Top 100. Jeremy is also a contributing editor of youngresearch.com.
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