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Martin Tillier

Martin Tillier

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Energy Factors Point To A Contrarian Trade In Railroad Stocks

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Contrarian trading, taking positions in opposition to prevailing trends and sentiment, can be addicting and, like most addictions, can also be dangerous. One should always respect the power of momentum, but when that momentum stalls and whatever has driven a move looks to be fully priced in it can present traders with golden opportunities. That seems to be the case right now with several railroad stocks. The case for stocks in that sector are both obvious and ubiquitous, but that is what makes it time to oppose that view, and there are two energy-related factors that support that contention.

Let’s start with that bull case.

Railroad stocks in general are driven by general economic growth, or more accurately by expectations for growth. With those expectations running high, stocks in the sector have been posting significant gains this year. Union Pacific (UNP), for example, is up around fifty percent since the lows twelve months ago.

(Click to enlarge)

With the market seeing the trade agreement with Mexico as a sign that other agreements can be reached, the biggest danger to sustaining that growth is seen as receding, so one would logically expect railroad stocks to have surged again over the last week or so, but that hasn’t been the case. That would indicate that good news is priced in, but there is another, energy related factor that suggests that the optimism is in fact overdone.

In North America an important part of growth…

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