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Why Warren Buffett is Riding the Rails

WBW has been reporting extensively on Warren Buffett's repeated purchases of Burlington Northern stock. Today there are a couple of pieces on the web exploring what makes Burlington and the railroads attractive.

The print and online editions of the Wall Street Journal have a column provided by breakingviews.com headlined Investing for a Long Haul. It points out that private-equity investors realized an annualized return of at least 30% by selling Dakota, Minnesota & Eastern Railroad this week to Canadian Pacific. But it wasn't a quick hit. The PE group bought the railroad 21 years ago. That's operating on Buffett-time.

The column sees some long-term positives for the railroads, including improved pricing power and the "huge barriers to entry for competitors presented by the difficulty and cost of building new tracks." But, it also points out that a shaky U.S. economy could hurt freight volume and P/E ratios for many railroads are now running higher than the historical average, suggesting an "uneven stock journey in the short term."

Over at Forbes.com, Validea Capital Management founder John Reese writes about how his computer models designed to "mimic" the investment strategies of "Wall Street greats" are also bullish on railroads. But, he says, "interestingly, it's not my Buffett-based strategy that rates them highly, but instead the model I base on the writings of Peter Lynch."

For example, Burlington Northern's average EPS growth rate of over 27% makes it what Lynch might call a "fast-grower" .. something he likes very much. In addition, another measure Lynch uses, the price-to-earnings-growth ratio, looks good for Burlington at 0.61. That's well below the Lynch-based model's acceptable level of 1.0. Norfolk Southern has an even lower P/E/G radio of 0.38.

Reese argues that with "higher fuel prices for trucking companies, increased demand for coal transport, and the need for a way to move an increasing amount of imported merchandise across the country" railroads have a bright future.

Even if the Reese Buffett-based computer model isn't as bullish on railroads as the Lynch-based version, there's no doubt Mr. Buffett is bullish on Burlington, at the very least. The Reflections on Value Investing blog has a handy summary of the size of some Buffett holdings as measured by the percentage of the company's outstanding shares owned by Buffett.

It shows that Buffett's current Burlington stake of 15% puts it above his 13% American Express stake and well above his celebrated Coca-Cola stake, which is 'only' 8.7%. (Of course, in absolute terms, 8.7% of Coke's $125.5B market cap ($10.9B) is double 15% of Burlington's $28.5B cap ($4.3B).

Still, if Buffett does indeed go to a 25% Burlington stake as he's told the company and the government he might, it would be #2 on the stake-size percentage list, trailing only Buffett's 80% stake in Wesco Financial.

Questions? Comments? Email me at buffettwatch@cnbc.com