With natural gas prices soaring up to nearly $4 per thousand cubic feet—nearly the highest level in 18 months—there's chatter in the market that utilities could start switching back to coal.
"And if coal volumes start coming back, the railroad business could pop because rail is the best way to transport coal," Jim Cramer explained.
So, what's the best way to play the theme?
"You can't own Burlington Northern anymore," said Cramer. Warren Buffett bought the company. "I have no problem buying its parent company, Berkshire Hathaway," said Cramer. But that's hardly a pure play.
That leaves only a handful of other names because the railroad business is an oligopoly – that is an industry in which there are only a small number of players.
Union Pacific has been a laggard, however if utilities do, in fact, switch to coal, Cramer can see shares marching higher.
"Coal accounts for around 20% of their freight volumes," Cramer said. "If utilities stop substituting natural gas for coal in their peak hour power generation, and I think that's a very real possibility, then I bet Union Pacific can play catch up. As long as natural gas keeps running, this stock should be a little engine that could."
Cramer said what's good for Union Pacific may be even better for Norfolk Southern.
"At Norfolk-Southern coal shipments now account for around 26% of the company's revenues. Remember, Norfolk Southern is an east coast railroad, and the east IS where most of the coal comes from. Although most of Norfolk Southern's business is doing very well, in the last two quarters, a 14% drop in coal shipments caused their total volumes to decline by about one percent. In other words, the horrible weakness in coal has been offsetting the strength everywhere else."
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Cramer thinks CSX is worth a look too.
"This is a very well-run railroad," Cramer said. "Although CSX has been getting hammered by declines in coal volumes—down 17% quarter-to-date, it's other traffic is going strong."
All told, Cramer thinks higher nat gas prices are a boon for railroads because coal, which is cheaper, becomes more desirable financially.
"As long as natural gas prices are rising, the three railroads mentioned above should keep chugging higher. Union Pacific is the cheapest, and Norfolk Southern has the most leverage to a coal rebound," said Cramer.
Kansas City Southern
If you believe in the recovery but the whims of nat gas leave you cautious Cramer has another idea all together.
"Look at Kansas City Southern," he said. "It's a smaller railroad that connects Mexico with the United States," he said, "it controls most of the freight transported between the two nations." As the economy of Mexico takes off, Cramer believes shares of Kansas City Southern could take off too.
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