Site’s Value Investment Fund’s 2020 Return: 35.46% Current Fiscal Year To Date 04/17/21 (179 Days): 48.1%
Dow Jones Industrial Average Return for 2020: 6.02% Dow Jones Industrial Average Return Fiscal Year to Date: 20.6%
S&P 500 Return for 2020: 15.28% S&P 500 Return Fiscal Year to Date: 21.2% S&P Composite 1500 Return for 2020: 15.01% S&P Composite 1500 Fiscal YTD: 22.6%
Russell 2000 Return for 2020: 18.5% Russell 2000 Return Fiscal YTD: 38.8%
The transportation sector of the United States economy is composed of nine industrial groups. One particular group moves more volume of tonnage based on ton miles than any other form of transportation – railroads. In accordance with the Federal Department of Transportation, railroads move 39.5% of all freight in the US (based on ton miles which is the length freight travels). It’s a $60 Billion industry with over 140,000 miles of track. It is dominated by seven major carriers (referred to as Class I Railways). Six of these carriers are publicly traded. The seventh is owned by Berkshire Hathaway. A recent announcement by Canadian Pacific Railroad to merge with Kansas City Southern will consolidate this railways pool to five potential investments in the third quarter of this calendar year 2021.
The key to success with this pool is determining intrinsic value. This is one of the few times that the discounted cash flows method is warranted in the intrinsic value formula. Once calculated, given the high stability of earnings, the intrinsic value is adjusted annually about four to five percent higher depending on financial and actual performance in accordance with each railroad’s key performance indicators.
The following articles articulate this railways pool of investments and provide all the decision model justifications, formulas, changes and reasoning for the respective buy/sell model. You must be a member of the Value Investment Club in order to access the respective articles and the buy/sell model. Click here to join: Membership.
Value Investing Episode 1 – Introduction and Membership Program
The following graph illustrates the performance of the railways pool during the first year. In effect, this pool outperformed the market by a factor of 3.5. Furthermore, it was able to achieve this with only FIVE full cycle transactions.
I noticed that Union Pacific (I consider Union Pacific the highest quality stock within the six Class I railways of the railroad fund) is now at $165.00 even. A 17% drop is the requirement for me to buy; see my article: Union Pacific - Buy/Sell Model. The prior high was on 01/24/2020 at 9:55 AM at $188.90. A 17% drop means the price would need to dip to $156.79 before I can purchase any stock. If this happens, I will use the excess cash of $1,304.65 to make a purchase. I will go one step further, if my Norfolk Southern increases in value back to my buy point of about $202 per share, I'll sell half to buy Union Pacific at this extremely low price. As stated in several of my articles, the key is purchase quality stock at a good price. Union Pacific as of this month is the best quality stock of the existing six railroads to choose from. I am simply reducing my risk at no cost to the fund. It is unlikely Union will drop while Norfolk Southern increases; but at least I conveyed my thinking related to economic substitution and its value with reducing risk.
In yesterday's post, I indicated that if Union Pacific's share price drops to $156.79 that the fund would use its excess cash to purchase shares. Well, today at 10:35 AM it did drop to $156.39. Therefore, I used all remaining cash to purchase 8.268268 shares (includes $1 per share cost to make the purchase). If you read my article: Union Pacific - Buy/Sell Model you would understand that I use a 17% price change requirement to buy. With Union Pacific, this occurs about once every three years and it just did, driven by the market scare with coronavirus.
There are six Class 1 Railways traded in the US market. If you look at each railway's respective annual and quarterly filings, all of them report certain key performance indicators (KPIs).
There are four key performance indicators. The first three are incrementally more valuable. Of the four, revenue ton miles is the most important as it identifies the actual volume moved during that period of time. Only three of the six publicly traded railroad stocks report this information weekly. The remaining three only report the total annual amount in the yearly financial report. Since sales are an instrumental value with evaluating a railroad company (costs of operations, variable costs, are easy to determine and fixed costs are stable), it is a simple algorithm to determine profitability from those sales. Thus, revenue ton miles is the highest weighted value of all four key performance indicators. I believe revenue ton miles should be weighted more than 70% of all four key performance indicators.
Next, the number of carloads moved that week validates revenue ton miles due to the high correlation of the two metrics. Two of the six railroads (CSX and Norfolk Southern) do not report carloads; they use a variant called 'Cars Online' which includes all cars whether they are sitting at a terminal, or not being used at all. It isn't the same as carloads. A third and important metric is velocity. Velocity is important, but only if the velocity trends poorly over a long period of time (more than 4 weeks). Other than that, velocity doesn't impact the ability to forecast profitability due to the many variables involved.
The last metric is called dwell time. This one doesn't really assist in forecasting profitability either. It is an efficiency measurement and I would only be concerned if it trends higher over very long periods of time (more than eight or nine weeks).
Overall, give a lot of credence to revenue ton miles, then carloads. The remaining two key performance indicators do not have a good correlation to profitability unless their results are poor over an extended period of time.
Value investing is a principle of investing whereby the investor uses ratios and comparative analysis of similar investments over an extended period of time. In this case, I compared the six publicly traded Class I railways in the United States. Then based on the results, I exercise buy and sell points for each stock within the fund. In this case, Union Pacific Railroad's prior peak (high selling price) was $188.96.
49.060606 Shares of Norfolk Southern Corporation - Closes at $175.82/Share FMV = $8,625.84 (Avg Buy Price/Share = $203.83 for Basis of $10,000.00)
Cash Position including recent dividend payment from NSC = $1,555.16
Total Fund Balance = $10,181.00
FMV Gain as a % Since Inception: = 1.81%
A few months ago, many might have predicted that 2020 would be a difficult year for railroad stocks. The shutdown of the U.S. economy in March caused transportation and shipping activity to slow to a crawl, and to be sure, most related stocks crashed. Furthermore, the oil crash specifically painted a grim long-term picture for ...
Railroad stock offers good upside potential with very little risk involved. This particular railroad fund is outperforming the DOW Jones Industrial Average by a factor of three. Learn about value investing from this series of articles.
On 09/14/2020, Norfolk Southern Railroad's price hit $220.13 at opening. I set my sell point via an automatic sell at $219.88 and thus the shares automatically sold at $220.13. After paying a $1 per share fee, the railroad fund that I write about on this site generated $10,750.65. My cost basis in them was exactly $10,000 from two different transactions back on 02/23/2020. On that day, the market crashed due to the COVID scare and the lack of action by our Federal Government. This means, I held the shares for 205 days. During this time, the share had dividend payments of $92.34. Thus, my total earnings over 205 days equaled $842.99.
The daily earnings equals $4.11 or if annualized equals $1,496.82. This means my annual return was 14.97% after fees.
Today, I sold 59 PUT options for Union Pacific with a strike price of $170.00 with a final date of February 19, 2021. PUTs are simply selling insurance that if the stock price drops to $170 per share, the Value Investment Fund will have to buy them from the owner of the puts. Today, the PUT for $170 is selling for $6.60 each. See the BID column and the highlighted reference point. Thus, if exercised, the Fund will have to put up $10,090 including transaction fees.
This morning at the market opening, the railways pool of the Value Investment Fund purchased 98.2849 shares of Norfolk Southern at $202.49. Altogether, including transaction fees of $1 per share, the fund invested $20,000. This post also explains that the dispersion values increased from 8% decrease in price from prior peak to 10% decrease. This is a result of the Lessons Learned article posted earlier this week. Value investors use financial analysis to substantiate their respective decision models for investments and pools of investments.