You want some outside the box thinking? Then go to the amazing conference call of the giant railroad that is CSX (CSX) and learn what's working in the first quarter and would could continue to work for the rest of the year
First, some background. I have longed praised the rails as the single best way of getting a snapshot of the economy. Many people rely on government data, such as information from the Commerce Department or the Fed.
I have always found that data suspect. In fact, go back to when Jerome Powell created his own darned bear market back in October of 2018. Powell was gung ho on one rate raise in December and three more this year because he feared runaway inflation. He thought the economy was hitting on all cylinders. But the kind of work I do, from the bottoms up, checking with the retailers, the autos, the chemicals, the papers, the homebuilders, and most important, the transports, companies like FedEx (FDX) and the rails themselves, was telling me an entirely different story. The mosaic I was putting together by hand, showed me that all of these sectors, all of them had peaked, not because of the president or congress but because we had just gotten nine rate hikes and we had fallen into some lockstep pattern that was going to crush us.
Powell's team never wanted to admit they got it wrong. And while Powell himself is very humble and we should be grateful he stopped it with the TV interviews, saying how hot the economy is, he wouldn't have because the fact is it seems that his people never want to get their hands dirty by going down to the conference call level.
Sure they have their briefing books and white papers that come out and some of the branches, like St Louis, do high quality research. We got the Beige Book today and it's got some good info as always, but not as good as what you can get yourself by knowing the companies that have the data and the pulse because they are backed up by cold hard cash, actual bills of lading, receipts, and manifests.
After doing my work, I am a believer, as you know, that the economy is not too hot nor too cold and therefore it should be allowed to breathe without another chokehold Fed funds rate increase.
I base that, again, on the grand pastiche of my own. Integral to that? The transports. Now if you remember, the last big data points we got from major transports were negative: the largest freight forwarder, FedEx, and the second largest trucking company, J.B. Hunt (JBHT) . Fedex's Fred Smith came on Mad Money and talked about how the world was downticking and it was impacting all business. It was a particularly downbeat conversation after a very subdued call.
Then J.B. Hunt the other day talked about how the whole country's commerce seemed to continue to cool. It was something to hear that company say that there was no pick-up in the economy. All his numbers were down 6%-7% with March being a minus 7.
However, you can never just rely on one or two companies. After all FedEx has huge business overseas. It has a heavy skew to China which has been having a slowdown until about seven weeks ago but it has also placed a gigantic bet on Europe. We know that those two markets aren't representative of the country.
So, along comes the first of the rails, CSX, and I am rapt because it is amazing how strong its business is. Sure, it's an east southeast rail for the most part and rails don't stretch to Buenos Aires or London or Marseilles if you are all about hard Brexit.
But it's a great tell of things, a terrific jumping off point for great ideas to make money. I want to be sure, before I give you these ideas, that I am simply marrying stocks with data, to show you the concept. Of course, I would do more research to make the meld more certain, but I have done a lot of work ahead of the quarter on the companies I am about to mention.
How do you do it? You turn to a page that all rails have in their decks, you turn to the revenue highlights, the one in this case labeled "Strong Price and Favorable Mix Drove Revenue Gains."
First one: chemicals: plus 5%. The commentary: Chemicals increase driven by broad-based growth partially offset by LPG, fly ash and sand shipment declines. What do we have here? Who can match to that? Dow (DOW) , that's who, Dow with a stock that has a 4.79% yield and a robust book of business as I know from recently interviewing CEO Jim Fitterling. Dow's got plenty of plants in CSX territory so I like the evidence.
Next is automotive: plus 2 percent. The commentary: automotive driven by strength in trucks and SUVs. GM (GM) and Ford (F) of course come to mind. I want to go with Ford because it's got more SUVs and trucks than any other manufacturer as a percentage of business. Ford sells at 8 times earnings. It yields more than 6%. It has streamlined and cut costs endlessly. I know its gutsy but I think the stock can be bought and be bought right here.
Ag & Food Products: plus 12%: The commentary: "driven by grain and ethanol strength." I'll go back to the well here and suggest that DowDuPont (DWDP) be bought on this. Dow's got a monster good crop protection business and the old Dupont's ag merchandise could be a perfect fit. It's already preannounced a weak quarter so it's appropriately derisked.
Forest Products: plus 11%: The commentary: "led by growth in building products and strong export demand." Tough one. You could open the file on Weyerhaeuser (WY) but I am tired of losing money on that one, even with its 5% yield. I would rather go with the derivative and buy the stock of Lennar (LEN) , the giant homebuilder, with its headquarters in CSX territory.
Next up: Minerals: Then the last one I care about: plus 8%: The commentary: increased construction and paving products. This one's tough. Caterpillar (CAT) could be a winner but its business is too worldwide. Martin Marietta (MLM) , the aggregates company would come to mind. But Bank of America/Merrill Lynch just downgraded it the other day. Too worrisome. I got a better one anyway. Jim Fish, the CEO of Waste Management (WM) , has often commented that the best source of revenue for his company is construction. His company just announced the acquisition of a competitor. Business is good and I think getting better. It's the right one to marry with the data.
Now there are other categories: metals and equipment, fertilizers, coal and intermodal. I can't make much hay on these though. The metals are doing well because of steel but there's too much competition in steel. Fertilizers? Too commodity. Coal? Not on my watch. Intermodal? That's back in the negative world of J.B. Hunt.
Now we all know better than to just slap on stocks. We have to check the temperament of the market. Right now there's a panic going on in health care about Washington ending the trough that so many companies have fed on. Even though everyone knows it won't happen, even though, we have a divided government, many portfolio managers remember when Obama went after health care and even as it turned out that many of the companies that were meant to be hurt ended up winning, the stocks traded at much lower prices than these stock have and many of them have been up for a decade. You know it is not over when big cap companies like Lilly (LLY) and HCA Healthcare (HCA) just wilt day after day.
When you see that money pouring out of the market it is going to be looking for a home. The home will most likely want some economic sensitivity. Who has that? How about the rails and the categories that I just went over?
Now, I am doing real shorthand here. But what I have given you is the craft as I have practiced for 40 years. There are plenty of ways to skin the cat, this one works for me. If you are curious person it could work for you, too.