Wednesday, February 22, 2012

Was Buffett Wrong, Or What Is Wrong With the Rail Stocks?

It has been a little more than two years ago since Warren Buffett's Berkshire-Hathaway made its stunning bid for Burlington-Northern railroad, for $44 billion--the largest acquisition in Berkshire's history.  Buffett said the bid reflected his confidence in the long-term prospects of the U.S. economy, and the rail industry in particular.

Berkshire paid nearly 20 times forward earnings for Burlington.  Even if it is the best rail operator in the industry, why are CSX and Norfolk-Southern selling for only 11 times forward earnings, and Union Pacific at 13 times?

The great investor might have overpaid for Burlington, but even so, why is there such a disparity in valuations?  And why have the transports been so weak when the Dow and the S & P 500 reached four-year highs this week?

I'd still raise cash here but would consider buying the rails on a correction.

Steve Lehman

S & P 500:  1358

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