Matt Insley

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.”

030613_drh2

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…

030613_drh

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,

Matt Insley

Original article posted on Daily Resource Hunter

Matt Insley

The Managing Editor of the Daily Resource Hunter, Matt is the Agora Financial in-house specialist on commodities and natural resources.  He holds a degree from the University of Maryland with a double major in Business and Environmental Economics.  Although always familiar with the financial markets, his main area of expertise stems from his background in the Agricultural and Natural Resources (AGNR) department.  Over the past years he's stayed well ahead of the curve with forward thinking ideas in both resource stocks and hard commodities. Insley's commentary has been featured by MarketWatch.

Recent Articles

The Price Floor That’s Key to Gold Mining Profits

Matt Insley

Gold has had a rough go of it since the 2008 financial crisis. But according to Matt Insley, there is now a very clear price floor for the yellow metal. And what's more interesting, he comes to this conclusion by way of a glass of chocolate milk and Janet Yellen's actions from here throne at the Eccles Building. Read on...


Why You Should Tune-Out the Talk of a Tech Bubble

Paul Mampilly

The recent spate of new tech-based IPOs has a few prominent investors (Ahem... David Einhorn) touting the return of the '90s tech bubble. But there are some very good reasons why this market is nothing like the '90s, and why investors should be wary of any advice to the contrary. Paul Mampilly explains...


The Scariest Thing You Don’t Know About Generic Drugs

David Eifrig

Generic drugs are supposed to lower healthcare costs and provide you with another medical alternative. That's what it says on paper. But there's a real danger that goes along with these drugs. A danger even your doctor might not be aware of... Dr. David Eifrig has the full story. Read on...


An Unlikely Source of Dirt-Cheap Energy

Greg Guenthner

The solar panel turns 60 on Friday, but this birthday celebration will be unlike any other the industry has seen so far. In the past, solar energy's high price tag meant its wide-spread usage was nothing more than a pipe dream. But now, after six decades, solar power may finally be cheaper than oil and Asian liquefied-natural-gas. Greg Guenthner has more...


5 Min. Forecast
How to Profit On the Back of an “Activist Investor”

Dave Gonigam

Since the invention of the "shareholder rights plan" (i.e. the "poison pill"), most companies are relatively immune to hostile takeovers. But according to Dave Gonigam that could all change thanks to one activist investor. And if you're savvy enough, you may just be able to follow his lead for big gains. Read on...