When trolling for buy opportunities, be careful not chase stocks that have been running higher for some time. There are a lot of them out there, and buying a stock that's extended too far past a proper entry point is an easy way to lose money. Instead, focus on stocks that have been basing and consolidating gains.
With that in mind, several railroad stocks look interesting at current levels. Rail demand as a whole remains strong amid stubbornly high fuel prices.
Kansas City Southern (KSU) is arguably the leader in the group, but it's already extended in price. Instead, check out Genesee & Wyoming (GWR), my favorite railroad stock.
Based in Connecticut, Genesee & Wyoming has a market capitalization of $2.5 billion. It owns and operates short line and regional freight railroads. It also provides railcar-switching services in the U.S., Canada, Australia, the Netherlands and Belgium.
Fundamentals are solid. Earlier this month, the company reported a 58% rise in third-quarter profit. Sales growth accelerated from the second quarter, rising 39% to $217.2 million. Genesee & Wyoming also has good institutional sponsorship. Unlike several other railroad names, it's not over-owned yet -- 435 mutual funds owned the stock at the end of the third quarter. I generally consider a stock over-owned when this number exceeds 1,000.
Genesee & Wyoming been working on base since May, and it could be on the verge of a breakout over $62.50, its Oct. 28 intraday high. Some like to cheat and buy a stock in anticipation of a breakout, but I prefer to wait for the breakout to happen in heavy volume. Let's see if GWR is up to the task.
My second favorite name in the group is Union Pacific (UNP), which has a market capitalization of $49 billion. It's also in position to break out above its recent high of $103.80. Fundamentals are solid here, as well. Third-quarter profit rose 19%, while sales increased 16% to $5.1 billion. Annual return on equity is solid at 16%. I'm also encouraged by recent signs of accumulation in the stock. It yields 1.9%.
Finally, Norfolk Southern (NSC) has been basing since late July, and it could try to break out soon above a swing point of $75.86, the stock's Oct. 27 intraday high.
As with the prior two names, Norfolk Southern boasts strong fundamentals. The company recently reported a 34% rise in third-quarter profit whiles sales grew 18% to $2.9 billion. Annual return on equity is solid at 14%. The company also generates a lot of cash. In 2010, cash flow per share was $6.48, well above 2010 profit of $4 a share. It yields 2.3%.