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).
The following articles articulate this investment pool 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.
The following graph illustrates the performance of this 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.
Today is November 15, 2019 and Canadian Pacific Railroad recovered in accordance with my railroad fund investment model to $241.47 per share. The value investing model automatically sold at $241.47 and the price per share continued to climb to $241.86 when the market closed at 4 PM. This sale generated a 9.31% return on the investment over 27 days. Annualized return is > 100%.
It's the end of the quarter and time to report on the railroad fund. The fund started on 10/21/19 but I'm resetting the fund's timing to the end of the quarter so that future quarterly reports tie to actual calendar quarters. The market value of the fund is $10,392.74 and I started out with $10,000 71 days ago. Thus, I've earned approximately $5.53 per day since inception. My cost basis is currently $10,270.32 driven by one sale of stock on 11/15/19 and receipt of dividends. Thus, since inception, this fund is growing at a slightly higher rate than 20.13% annualized.
During the last 30 days, the fund held 13.52375 shares (original investment of $2,500) and sold them on 01/17/2020 at 9:40 AM when the price in the market hit the target under the value investment principle at $207.17. The value investing principle (simply stated) required the share price to hit the prior peak price which was $206.46. However, on that morning, the share price instantly jumped past $206.46 to $207.17 triggering the sale of the stock. The gain on the sale net of costs of $1.00 per share to buy and $1.00 per share to sell was $288.19. The stock was purchased on 10/23/19 at $183.86.
Volatility is necessary to create market fluctuations. Market fluctuations create price disparity for either intrinsic value (buy side of the buy low/sell high tenet of value investing) or price recovery, i.e. unsubstantiated high market prices for stock. The COVID scare is causing the stock market to suddenly drop across the board for all stocks. This provides opportunities to buy low and simply wait for market recovery to sell.
I noticed that Union Pacific (I consider Union Pacific the highest quality stock within the six Class I railways) 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.
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'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 test fund is outperforming the DOW Jones Industrial Average by a factor of three. Learn about value investing from this series of articles.