CSX Corp (CSX)

Hunter has moved to this rail. This is not CP - 2. It is not the same situation. Different time, valuation and different railway. Their coal business was 20% of the business and has dropped right off. They tried to replace it with intermodal with some success, but struggling. Their ratio is now below 70 and there is only so much Hunter can do. It is a valuation story and it is in the hands of the economy. He would pass on it.

From a currency standpoint, he would prefer to shop in his own backyard in Canada. However, there are a lot of strange things going on with respect to trade wars, and all kinds of movement of goods between the borders, which is going to be a big issue. If you have US$ and looking at this, he doesn’t see why you wouldn’t go into it with Hunter Harris moving over to that name.

An Eastern based railroad. When Hunter Harrison was still employed by Canadian Pacific (CP-T), overtures were made to do a merger. He used to own this because it was cheap, hoping that the existing management would turn it around. If you own, he would be inclined to take some profits.

Hunter Harrison has left CP-T and is rumoured to be heading to CSX-N. The question is whether he can unleash the metrics he did on CP-T. If this is true then you should hang on despite the 20% increase in CSX-N today. Most of the rail stocks are quite expensively valued. Betting on any boardroom battle is always risky, but he has made two underperforming rails into stars.

The rails have come back somewhat with the thought that the US economy might build a little bit. They have been very reliant on coal. As much as Trump talks about bringing back coal and manufacturing, he does not think coal will come back in a big way to rails so they have to offset it. They increased their intermodal business. Basically they are a proxy for industrial activity in the US. He prefers Union pacific.

Rails have been very strong for the most part, post the election. This one is up 8%-9%, maybe 15% since October. Trump has put his commitment back behind the coal miners, and coal is a big portion of this company’s rail. He prefers Kansas City Southern (KSU-N), which owns the rails going from Mexico up to Canada. The stock sold off about 14% post the election because of Trump’s Mexican wall. There is a tremendous amount of traffic, and Kansas City trades at a discount.

Make most of their money shipping coal. With Nat gas going down it is not doing well.

Prefers Union Pacific (UNP-N) in the US, and Canadian Pacific (CP-T) in Canada. There is not much difference between the 2 Canadian rails, but CP is trading a little cheaper. Union Pacific is trading at 16X. The trouble with the Eastern rails is that they are shorter hauls. Efficiencies in rails come with longer hauls. All US rails are beset with coal. Intermodal is where they have tried to grow the business.

(Market Call Minute.) A little more exposed to coal, which is a negative. Operationally they have done a very good job bringing down their operating ratios.

A $25 billion company operating through 23 US states. Rails and transports led to the downside in the correction that started last March/April. Transports have made a nice turn and are behaving much better. Canadian rails have had great rallies off the lows, and are behaving quite well. If you think energy prices can remain relatively low, truckers can be competition to rails. Thinks there are some headwinds. This looks okay, but he would prefer Canadian National (CNR-T) which gets north/south traffic, and the shares have behaved much better. Financials look very strong and they are going to grow their earnings 13% this year and probably 10% next year.

Chart shows this was in an uptrend from 2013. Once it stopped making higher highs and higher lows in early 2015, it broke down. Now we are getting a series of lower highs and lower lows. Right now this is in a downtrend.

This has been a really tough part of the market. For the Eastern rails in particular there is the coal exposure. With natural gas prices as low as they are, there was a 15% decline in coal volume last year, and another 20% this year. This quarter has guided really weak, and then improving from there. Has cost initiatives that they still have to get down. Right now this is a tough place to be. Looking forward to infrastructure that the rails have, especially at this time with how much they have pulled back, she is still Long the stock.

The chart shows a classic topping breakdown. It touched the rising trend line over and over again, and then topped. Broke down through the neck line at around $31, and then fell down. It tried a countertrend rally which didn’t work. The next support level should be at around $17-$18.

A switch into anything might be a good idea. He would prefer an ETF into mid cap banks. Crystallize the loss.

Rails have been beaten up pretty badly. There might be fundamentals that come around as some point in time, but you want to see the charts confirm that fundamental picture. This rail is over indexed to coal, the energy complex, and commodities in general are pretty much in tatters and not showing signs of life. There are definitely better places with lower risk.