Union Pacific

Union Pacific Railroad is one of the six Class I Railways (US Department of Transportation classification) publicly traded in the market. It is the largest of the six and one of the oldest rail systems in the world. It is considered the grandaddy of railways.

Union Pacific Loses $20 Billion of Intrinsic Value in 2021

Railways Pool, Investment Fund / By / 02/18/2022
Union Pacific

In 2021, Union Pacific had sales of $21.8 Billion, the 2nd highest ever recorded. Union Pacific generated a pretax profit of $8.5 Billion, the highest in its entire history. In effect, 2021 was one of the best if not the best financial year in the history of Union Pacific. But yet, Union Pacific’s intrinsic value dropped $20 Billion during the same time period. How can this have happened?

Value investors focus on intrinsic value and the market’s valuation points. However, the Board of Directors are focused on returning value to the shareholders. Bascially, the Board authorized a stock buy-back at a price dramatically higher than the stock’s intrinsic value. The difference is equivalent to transferring intrinsic value to a few lucky shareholders at the expense of remaining shareholders. This business concept of treasury stock (buying back stock) is only effective IF the stock is purchased at or less than the stock’s intrinsic value.

Sold Union Pacific PUTs

Railways Pool, Investment Fund / By / 03/04/2022
Union Pacific

Union Pacific is a high quality stock. Over the last twenty years, this company has  never failed to earn a profit. During this time period, there have been two recessions. The simple fact is that Union Pacific is a solid investment. The company has paid a dividend for the last thirty years. Its current yield at $210 per share is 1.83%. 

Union Pacific’s intrinsic value is estimated at $185 per share. Thus, any opportunity to own Union Pacific for less than $185 per share is considered an excellent buy.

From the Lessons Learned article for the Value Investment Fund’s 2020 performance, one of the additional tools to leverage higher the Fund’s annual return is to sell PUTs. A PUT is an option for the holder of the PUT to sell an asset, in this case stock, for a preset price referred to as ‘Strike Price’. The seller of the PUT is basically selling an insurance policy that if the market price drops to the strike price, the seller of the PUT is willing to buy the stock at that price. PUTs are a viable alternative to owning stock at less than intrinsic value. 

Sold 113.6363 PUTS on Union Pacific Railroad

Railways Pool, Investment Fund / By / 03/04/2022
Union Pacific Railroad

In keeping with the value investment fund’s pattern, on Friday the 29th of January, 2021 the Fund sold 113.6363 PUTS on Union Pacific Railroad. These PUTS have a strike price of $175 and are currently sold at $6.24 each. The Fund netted $5.24 each after a $1 per PUT fee. Total realized value equals $595.45 (113.6363 * $5.24). See the table below.

Union Pacific Railroad’s current market price is near $200 per share and peaked on January 8, 2021 to $221.28 per share. Thus, owning such a high quality company at $175 per share is desirable. During 2020, this Fund bought and sold Union Pacific twice. In February of 2020, the Fund bought Union Pacific for $157 and sold in June for $183 netting a good return in a short period of time. In October the Fund bought Union Pacific for $174 each and sold the first week of January 2021 for $215 per share; again earning a good return on the investment. 

Historically, Union Pacific rarely has the necessary deep drops in market price and then market recovery in a short period of time (less than six months). It is simply one of the best stocks out there to own. The company has very stable earnings, an excellent record of good operations and is considered the best run railway of the six Class I publicly traded railways. If the market price were to dip to $175 per share, market recovery to $215 per share would most likely occur within six months. But even at one year, the return on the investment would equal 21.6%. 

Sold Union Pacific – 23.66% Return in 72 Days

Railways Pool, Value Investing / By / 03/04/2022
PUTs

Value investing is about buying low and selling high. The investor creates a model to set buy/sell triggers and exercises this program with investmetns. Back on October 29, 2020, the Railways Pool of the club’s Value Investment Fund purchased 114.9557 shares of Union Pacific at $173.98 each including a $1 per share transaction cost. In that post, the sell point was set at $215.17 which occurred this morning in the market. Union Pacific actually cleared $221 at one point this morning. 

The fund’s preset sell, automatically sold when the price hit $215.17. The fund netted $214.17 per share after paying a $1 per share transaction fee.

The return on the investment is $40.19 per share as follows:

56.67% Return on Investment: Union Pacific Railroad

Railways Pool / By / 03/04/2022
PUTs

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.

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