Low Tech With High Potential

 | Dec 27, 2013 | 5:00 PM EST
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The high-tech industry is all-ablaze with hot markets and hotter stocks. But sometimes old-time technology can still carry the day. A one-time tech marvel that began about 200 years ago and is still chugging along with great reliability is the freight railroad industry. It's old school, yes. Yet, railroads today are solid performers that present investors with desirable, stable opportunities. The whole world is not going online, and proof is found on this country's rails.

The largest freight line in the U.S. is Union Pacific Railroad (UNP). Operating in 23 states in the western two-thirds of the country, it has almost 32,000 miles of track and more than 45,000 employees. Even during the downturn of the Great Recession, when its business headed downhill, Union Pacific was able to put the brakes on its costs even more than revenues tumbled, which led to improved margins. And while coal's future is looking a bit sooty (coal is an important railroad market), Union Pacific's coal business is based around Wyoming and Montana's Powder River Basin coal, which is cleaner burning than that of its eastern cousins and, therefore, more desirable.

To choose stocks, I use a variety of computerized strategies I created by modeling them on the strategies used by some of Wall Street's greatest investors. My Peter Lynch-based strategy is the one tooting Union Pacific's horn. This strategy's most important variable is the P/E/G ratio, which is price-to-earnings relative to growth, and is a measure of how much the investor is paying for growth given today's stock price. A P/E/G of up to 1.0 is acceptable and Union Pacific's is a very acceptable 0.84. Also worth noting is that the company  is doing a good job Union Pacific is doing managing its inventories.

American Railcar Industries (ARII) serves the railroad industry. With predecessor companies dating back over a century, American Railcar is in the business of designing, manufacturing, selling, leasing and repairing hopper and tank railcars, as well as providing fleet management services. Like Union Pacific, this company is a Peter Lynch strategy favorite.

In the land of Peter Lynch, a P/E/G of 0.50 or less is considered very desirable, and American Railcar is residing firmly in this neighborhood with a 0.37 P/E/G. Also like Union Pacific, American Railcar is tightly controlling its inventory expenses.

Among today's desirable technologies, a railroad is no caboose bringing up the rear of the train. They are upfront and powering along well laid out, well-maintained rails. No question, they are going places.

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