(The following story by Tom Reese and Paul Rubillo appeared at Forbes.com on August 13.)
NEW YORK — We have recently removed CSX, Burlington Northern Santa Fe and Union Pacific from our recommended list. We are still recommending Norfolk Southern, but that may change.
These stocks have been big winners over the last five years, with Union Pacific up nearly 300%, CSX and Burlington North up 400%, and Norfolk Southern almost 500%. The dividend yields for the stocks now range from 1.25% to 1.86%. That does not give investors much of a downside cushion, and historically the stocks are known for slow and steady growth. The stocks may have gotten ahead of themselves, and we may start to enter a period of underperformance.
If you look at any charts of the stocks in the 10-year period of 1993 to 2003, you will notice that the stocks did not see much in terms of price gains but the dividends were always steady. There may be some hot-money-momentum fund managers starting to recognize this fact, so we are seeing the share volume picking up lately on the downside.
We know that Warren Buffett is a big believer in the sector, with a large position in Burlington Northern. We also know that Buffett doesn’t expect monster growth from his holdings, instead focusing on slow and steady returns. We think the railroads will offer a nice entry point at lower levels, and we will monitor the news flow of the sector to see how our theory holds up.