If Buffett Were Canadian, He’d Want This Stock (Canadian National)
When Warren Buffett likes a certain kind of candy he buys the whole dang candy shop.
In late 2009, Buffett’s buy big mentality led him to a well-positioned railroad play. But instead of just adding to his shares, Buffett bought out Burlington Northern Santa Fe Railroad (BNSF.)
Looking at today’s ticker, Buffett made the right move (again.)
Since his purchase, railroad stocks have been burning up the tracks. For reference, the Dow Jones Transportation Average, which started as a simple gauge of railroad activity, is booming.
Today, though I want to show you why there’s still room left in this transport trade. In particular, I want to share a unique way to double your money on a bustling railroad company. All aboard!
As common “Dow Theory” goes, if the economy is doing well the industrial sector along with the transportation sector should be booming. After all, for a thriving economy you must be making stuff and shipping stuff.
With a quick look at the industrials and transports, the economy appears to be booming – both the Dow Industrials and the Dow Transports hit brand new, all-time highs yesterday.
The railroad sector, in particular, is cashing in on this uptrend. Along with a general market rebound from 2008, America’s energy renaissance is adding new demand to an already booming market.
Years ago had you asked me if shipping crude oil by rail in the U.S. would become mainstream I’d think you were crazy. But today, with more light sweet crude flowing from “unconventional” deposits like North Dakota’s Bakken formation, the affordable, scalable, flexible rail system is providing a vital means of transport.
For example, on a recent trip to Williston, North Dakota I was witness to a host of rail traffic.
“See that?” my guide asked “that’s what Warren Buffet bought a few years ago.”
Rail shipments (lots of them) lining up in North Dakota
Railways across America are booming from a sea-change of energy flow.
In fact, things are going so well for the rail industry, besides hitting brand new highs yesterday, something else amazing is happening. Today, in Houston, the CEO for BNSF, Matt Rose, is giving a talk on North American energy, “The New Abundance and What it Means.”
This is huge. Just the fact that an executive for a railroad company is speaking at the IHS Cera Week event, is an amazing milestone. Five years ago no one would have seen this coming! Back then, railroads had no real business in the energy market.
Today the whistles are blowing a different tune, though. The same is happening throughout all of North America.
Indeed, after getting our feet wet the past couple days in the Canadian energy sector, now’s a great time to look at a solid Canadian shipper, Canadian National Railway (CNI.)
Take a look at how Canadian National has done over the past three years…
The chart above shows the company’s action since Warren Buffet bought BNSF in late 2009. As you can see, it would have paid to piggyback on the Canadian version of this transportation trend.
All told Canadian National is up more than 100% over that timeframe. That’s more than double your money.
…but it’s not where the opportunity ends for us today. Let’s strap on our opportunity boots.
If This stock Rises 3%, You Can Double Your Money
Now let’s get to the sexy part of this story.
Sure, Canadian National is a great looking company. But talking to any trader worth his salt, it’s not a stock that you’d want to dive head first in to. The point being: shares have been on a moonshot over the past 3+ years and it’s hard to pinpoint a buying opportunity.
Don’t get me wrong, you could surely “close your eyes and buy” as the saying goes – and sure, the trend could carry you much higher. But there is another unique way to play it.
That is, if you’re familiar with options trading.
After looking at the books I found a unique option strategy. In short, if Canadian National is trading above $105 (a mere 3% gain from yesterday’s close) by October 2013, you can double your money.
For those of you familiar with options, I’m talking about a bull call spread. In particular if you look at the October 2013 100/105 call spread you’d pay around $250 per contract with the potential to cash out $500 per contract.
And the rules are fairly simple here, even if you don’t know a thing about options…
If you purchase that spread at the price listed above, and the price of Canadian National stock is above $105 when the options expire (the 3rd Friday in October) you double your money. It’s really as simple as that.
[Note: if all of this “options” talk sounds like German to you, I apologize. However, I can guarantee you if you look into this spread, or similar straight forward options plays, you’ll be impressed with just how simple (and profitable) the strategy can be.]
In the meantime keep an eye on Canadian National. With no end in sight to the North American energy boom, rail companies like Canadian National will be chugging along for years to come.
Keep your boots muddy,
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