The rail stocks today are certainly not your grandfather's bloated, broken-down companies. Today railroads are key players in the inter-modal freight handling business. Importantly, they are widely seen as the most economical and environmentally friendly mode of hauling goods over long distances.. But there is little question that Mr. Buffett's purchase of Burlington Northern has added a shine to the appeal of railroad stocks that wasn't there before.
That shine may be in the process of dulling a bit. Our Dividend Valuation model for Union Pacific (UNP) shows an interesting feature that we have seldom seen for any stock since the beginning subprime crisis: overvaluation.
The chart shows that UNP's current price (red line) is just over $85 per share, more than 15% above our model's current predicted value, and nearly 8% above next year's predicted price. (The other major rail stocks show similar overvaluations)
As we have said before, overvaluation and undervaluation are not precise fall-off-the-cliff events. Stocks can stay overvalued or undervalued for a long time. But a look at UNP's valuation model shows that it has rarely been significantly overvalued: only 4 times in 20 years. Each time it became overvalued its price ultimately fell back to its valuation bar.
We doubt if the current momentum in the rail stocks gives a hoot about our valuation models, but we don't have to remind anyone that stocks get undervalued and overvalued and eventually they return to their value tracks.
A relative of the author owns UNP. Please do not use this blog for investment decisions. Please consult a licensed investment professional.