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Floods Dampen Rail Stocks' Surge

Andrew Fisher
Monday, 23 Jun 2008 | 2:27 PM ET

Devastated cornfields are not the only effect this year's Midwestern floods are likely to have on the markets. Longbow Research's Lee Klaskow says the railroads that operate through the region are feeling the effects -- in their physical plants as well as in the commodities they carry.

Still, he sees a positive side.

"This is actually a welcome pullback for the stocks," he told CNBC. "The stocks are still up 20 percent over the last 12 months, and roughly 25 percent year-to-date, but...the railroads still continue to get pricing, despite having negative volume."

Recommendations:

So what would he buy at these valuations?

"Our favorite name right now is Burlington Northern Santa Fe," he said. "Despite the...near-term headwinds...we still like its revenue mix: It has what we view as a more defensive revenue mix, that is, exposure to coal, ag(riculture), and intermodal."

He also likes Norfolk Southern, whose physical plant is located outside the flood-ravaged area.

"Norfolk Southern is, for us, the only deep value that's left within the rail industry," he said. "Norfolk Southern is the largest in terms of market share in (automotive) shipping; it's roughly 10 percent of their revenue. Obviously, with their largest customers GM and Ford, their near-term prospects have been hit pretty hard, but the long-term story for them is still intact."

Disclosures:

Neither Klaskow nor his firm owns shares in Burlington Northern Santa Fe or Norfolk Southern, and neither company has an investment-banking or other business relationship with Klaskow's firm.

Disclaimer

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