3 Reasons to Consider Buying This Railroad Stock

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Over the past year, despite a more than 14% move higher in the S&P 500, shares of CSX Corp (NYSE: CSX) are down. There are three reasons to consider buying CSX now.

CSX data by YCharts

Valuation

As shown by the chart below, CSX is trading close to historic lows in terms of PE ratio. Given this, I believe the downside is relatively small while the upside is big.

CSX PE Ratio TTM data by YCharts

Dividend Yield

As shown by the chart below, CSX's current yield of 2.55% is the highest since it yielded over 3% in early 2009. As it turns out, the 3% yield level turned out to be the bottom for CSX shares. Now, with the global economy, which CSX is heavily exposed to, in significantly better shape than it was in early 2009 and significantly lower interest rates than those in 2009, CSX's current 2.55% yield is a good value.

CSX Dividend Yield data by YCharts

Coal Stock Rally

One of the reasons why CSX has performed so poorly over the past year is its exposure to coal. However, coal stocks have shown real signs of a bottom over the past few months. Despite the bullish move in coal stocks, such as Alpha Natural Resources (NYSE: ANR), Arch Coal (NYSE: ACI), and Peabody Energy (NYSE: BTU) CSX shares have yet to respond. CSX shares are poised to move higher in response to the coal rally.

CSX data by YCharts

Not Bullish Coal

Over the long-term, I am not bullish on coal prices because of new natural gas discoveries. I agree with the thesis laid out by famed investor Wilbur Ross, an investor who made a lot of him money betting on distressed coal companies in the past. That is not to say that I expect coal to go away any time soon. Rather, I expect profit margins to remain depressed for coal companies such as BTU, ANR, and ACI. The supply of natural gas means that natural gas prices can only move so high before significant additional supply comes to market pushing prices lower. The upper limit on natural gas prices means that coal prices are also limited. However, this does not necessarily mean that CSX will do poorly. CSX's exposure to coal is driven by volume shipped, not price. Even if some utilities shift from coal to natural gas, I expect coal volumes to remain strong throughout the coming years. CSX is not a bet on higher coal prices; CSX is a bet that coal is not going away anytime soon.  

Conclusion

Investors should take advantage of CSX's lackluster performance over the past year by picking up shares of this high yielding, cheaply valued, and coal exposed railroad company.


sammypollack has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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