It's one thing for a kid to buy a train set. It's another thing when one of the world's richest men has his fund spend billions acquiring a railroad.
A few years ago, as the financial crisis took its toll on just about every stock in the US, Warren Buffett's Berkshire Hathaway purchased Burlington Northern Santa Fe for a total of $44 billion, then the company's largest deal.
Buffett remains bullish on railroads. In an interview with CNBC on Monday, the Oracle of Omaha said:
"All of the rails have done well recently. In fact, Union Pacific, which is our direct competitor, has done well. It's a business that has real economic advantages…. As long as more goods move from place to place in this country, rails are going to get their share and it should be a very profitable business."
However, with the Dow Jones Transportation Index down a little more than 1%, should investors buy with Buffett?
Talking Numbers contributor Richard Ross, Global Technical Strategist at Auerbach Grayson, notes that the "Transports" index is was up almost 39% in 2013 while the Dow Jones Industrial Average gained a relatively meager 26%.
"Yes, we've had some weakness here along with the broader market through 2014," says Ross. "But, I like what I see here in the shorter term chart. We've held that long-term [100-day] moving average on the pullback."
Ross says that while railroads have been "uninspiring" in 2014 compared to airlines, he thinks railroads and other transportation stocks have strength.
"Keep in mind, we've had horrible weather, as we all know, and the airlines have continued to soar," says Ross. "But, I do like the rails, I do like the transports as a group, and I would use this weakness as a buying opportunity."
(See: CNBC's Warren Buffett Watch)
John Stephenson, portfolio manager at First Asset Investment Management, agrees that the drop in the transportation index is a temporary setback.
"The reason this is happening is simply because we had a shift into defensive names and away from these cyclical names," says Stephenson. "Ultimately, we're going to go back to these cyclical names."
Stephenson notes that railroad stocks are generally trading at a discount to the market. And, he believes the companies themselves will see improvements in revenues once the winter is over. "Seasonally, March is also a very strong month for the rails, as well," says Stephenson, who is generally bullish on all transportation stocks as well. "So, I think on valuation, on longer-term trends, and a rotation from defensive to cyclicals, you need to be in the transport."
To see the full discussion on railroads and transportation stocks with Ross on the technicals and Stephenson on the fundamentals, watch the video above.
- Warren Buffett