The transports landed on the trader radar, Friday, with investors worried that the warm winter could hurt the rail stocks.
Because of the higher than expected temperatures, demand for coal has declined – and coal is largely transported via railroad.
In fact, because of the warm weather, Credit Suisse lowered estimates and price targets on CSX, Norfolk Southern and Union Pacific.
However, with all that bad news on the table, analyst Chris Ceraso suggests opportunity lies on the horizon - like Warren Buffett so often says, this may be the time to be greedy when others are fearful.
Although he thinks rails could have another 5-10% of downside risk, once the warmer winter is fully digested in these stocks, he thinks winds of fortune will shift.
“Once it’s in the numbers,” he says, “the risk reward becomes compelling. There’s 20-30% upside potential.”
Largely Ceraso thinks the market will realize that the rails are trading at the low end of historic multiples. “Right now they’re 10 times consensus numbers and 12 times my new numbers. But the typical range is 11 times on the low end to 16 times on the high end.”
And on top of that, he thinks the market is factoring in these lower than usual coal volumes for the entire year. However, we could get a hot summer. “If that happens, volumes should increase,” he says.
"The risk/reward scenario is starting to get interesting," Ceraso says.
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Trader disclosure: On Feb 24, 2012, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Najarian is long AAPL call spreads; Najarian is long IBM call spreads;’ Najarian is long CRM call spreads; Najarian is long SODA call spreads; Najarian is long JCP call spreads; Najarian is long ACI call spreads; Najarian is long FIO call spreads; Najarian is long UTX call spreads; Weiss is long EUO; Weiss is long WLP; Weiss is long QCOM; Weiss is long CHK; Weiss is long HK; Weiss is long KEG; Weiss is long VZ; Weiss is long MDRK; Weiss is short ANR; Weiss is short MT; Weiss is short AAPL puts
For Brian Kelly
Shelter Harbor Capital is long GLD
Shelter Harbor Capital is long TLT
Shelter Harbor Capital is long Treasury bonds
For Patty Edwards
Trutina Financial is long AAPL}
Trutina Financial is long JNK
Trutina Financial is long SPDR Gold Trust (GLD)
Trutina Financial is long Excelon (EXC)
Trutina Financial is long PM (personal and for clients)
Trutina Financial is long CBI
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For Dan Dicker
Dicker is long oil}
Dicker is long APA
For Mark Moerdler
Accounts over which Bernstein and/or their affiliates exercise investment discretion own more than 1% of the outstanding common stock of the following companies CA / CA Inc, CTXS / Citrix Systems Inc.
Bernstein currently makes a market in the following companies ADBE / Adobe Systems Inc, CTXS / Citrix Systems Inc, MSFT / Microsoft Corp, ORCL / Oracle Corp.
For Dan Binder
(TGT): I, Daniel Binder, CFA, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
For Chris Ceraso
The subject company (CSX, NSC, UNP) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (CSX, UNP) within the past 12 months.
Credit Suisse provided non-investment banking services, which may include Sales and Trading services, to the subject company (NSC) within the past 12 months.
Credit Suisse has managed or co-managed a public offering of securities for the subject company (CSX, UNP) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (CSX, UNP) within the past 12 months.
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (CSX, UNP) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (NSC) within the past 12 months
As of the date of this report, Credit Suisse Securities (USA) LLC makes a market in the securities of the subject company (CSX, NSC, UNP).
For Bill Chappell
SunTrust Robinson Humphrey, Inc. has no disclosures.
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