Question:
Is it a good time to invest in rail transportation? If so, would you recommend CSX Corporation (NYSE: CSX), Union Pacific Corporation (NYSE: UNP) or Norfolk Southern Corporation (NYSE: NSC)?
Answer:
Rail stocks have done quite well over the past year, as they are up about 20%. Both CSX and Norfolk Southern appear a bit pricy, trading at P/E ratios above the market as a whole. It is assumed that as the economy picks up, these companies will perform better as manufactured goods are transported across the country. That is precisely why we feel these are overpriced now. We feel earnings will catch up to the stocks’ valuation. Now is not the time to buy rail stocks because you will pay a pretty premium for them. They are a good long-term investment as the economy grows.
Would you pick The Boeing Company (NYSE: BA), General Dynamics Corp. (NYSE: GD) or Northrop Grumman Corp. (NYSE: NOC)?
We own both Boeing and Northrop Grumman. We feel both are in a good cycle. We evaluate the company and how the stock performs after the product launches, so even with the delays Boeing has had with the Dreamliner, the company has still performed well. General Dynamics has the lowest growth expectations of the three companies.
We feel Northrop Grumman is the best diversified defensive play available. There is a lot of pressure for the government to cut defense spending in the budget; however, we do not believe that will happen. If the defense budget were to be cut, GD would likely be the most negatively impacted.
Boeing and Northrop stocks pay about the same dividend at a little less than 3%, while General Dynamics pays about 2.5%. All are above the average S&P 500 stock dividend. These holdings would be fine for either taxable or nontaxable accounts.