Q&A: Rail Stocks and Defense Contractors

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.

Disclosures

This article is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.