Hop On Board

 | Apr 19, 2013 | 3:00 PM EDT
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Thursday marked the third significant down trading day of the week. It appears that the second-quarter swoon that we saw in 2011 and 2012 is arriving right on time. The latest sign that the economy is slowing a bit was Thursday's release of the Philly Fed Survey that measures business activity coming in weaker than expected. Given that we have the same political leadership on both sides of the aisle, the same policies, the same mess in Europe that we have had in the previous couple of years, the slowdown has a certain logical symmetry to it. But fret not, campers. The Federal Reserve is continuing to pump a large amount of liquidity into the market, so any selloff should be contained to a 5% to 8% range.

A pullback will allow prudent investors who have kept some cash on hand to snap up good stocks at lower entry prices. In the meantime, there are always areas of opportunity for those who want to enter the market without waiting for a decent decline in equities.

For example, Union Pacific (UNP) reported earnings Thursday. One thing that caught my eye in their report was that crude oil shipments more than doubled, year-over-year, as rail continues to benefit from the shale drilling boom. That led to two observations. First, that Warren Buffett guy is a pretty smart investor. His 2010 purchase of Burlington Northern, which is ideally positioned to benefit from this traffic (already 10% of revenues), is looking like a really good acquisition right now. Second, the tank car manufacturers must be happy as pigs in slop right now. Here are two players I like in this manufacturing niche.

The Greenbrier Companies (GBX) is a diversified manufacturer that builds all sort of railcars including tank cars. This company has just over a $600 million market capitalization (just over $1 billion including debt). It has a large backlog of $1.3 billion, which is sequentially accelerating, consisting of orders for just under 12,000 railcars of all types. The company has quadrupled operating cash flow (OCF) since the end of fiscal 2010 and stock is cheap, trading at 4x OCF. Consensus earnings estimates for both fiscal 2013 and fiscal 2014 have moved up nicely over the last month and GBX is selling at less than 9x forward earnings. Both Longbow and Keybanc have upgraded their ratings on the stock to Buy in the last 10 days.

I first highlighted railcar manufacturer American Railcar (ARII) in December when it was trading at $31 a share. The stock is now trading around $39 a share, and the recent pullback in the market offers a good opportunity to pick it up at a significantly cheaper than where it was trading a few weeks ago. Consensus earnings estimates have gone up dramatically for both fiscal 2013 and fiscal 2014 over the last two months. The company has easily beaten earnings estimates each of the last four quarters. The stock sells for just over 9x 2014's projected earnings and the stock sports a five-year projected PEG of under 1 (0.75).

Both Greenbrier and American Railcar will also likely benefit by the large increase in domestic auto production over the past few years. One final observation, I think either company would be a logical acquisition for General Electric (GE). The industrial giant is looking to expand its exposure to energy markets, it already makes locomotives, and both companies would fall in the $1 billion to $4 billion range it has stated that it has for strategic acquisitions in this space. It recently exercised this strategy by picking up Lufkin Industries (LUFK) for $3.3 billion.

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we like this chart here, it appears ready to move higher. BOUGHT BZUN OCT 35 CALL AT 3.40
Large-cap, high-quality McKesson (MCK) is too cheap now, at $147.51 or so. The stock hit $243.60 more than 2.5...



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