Looks like Warren Buffett got it right... again.

Last February, when Buffett's investment company, Berkshire Hathaway (NYSE:BRK.A), paid $27 billion to acquire the remaining shares of U.S. railway Burlington Northern it didn't already own, it was the largest takeover of Buffett's long and illustrious career. And it may turn out to be the most astute investment by the "Sage of Omaha".

IN PICTURES: 9 Ways To Use A Tax Refund

Railways Report Strong First-Quarter Numbers
The deal was a massive conviction bet that the U.S. economy was on track to a sustainable recovery and that one of the prime beneficiaries of this would be the railways. Judging by the first-quarter numbers now being reported by railway operators like CP Rail (NYSE:CP), Union Pacific (NYSE:UNP), Norfolk Southern (NYSE:NSC) and CSX(NYSE:CSX), Buffett's insight into the nature of the economy and the rail industry proved to be right on track.

Freight Gains Likely to Continue
Like the rest of the economy, the railways suffered during the recession, as freight volumes dipped sharply. But the rebound in shipments so far this year has proved to be much stronger than expected. Industry-wide, freight carloads jumped 7.5% in March, the first monthly increase from a year earlier since July, 2008. And, it's worth noting that this increase is broad and deep in nature. Volumes of all sorts of goods, including chemicals, metals, agricultural products and finished goods like automobiles, experienced healthy gains. It's a sure sign that the U.S. economy is firing on virtually all cylinders.

Railways Hold Environmental Advantage Over Trucks
While the chances that this momentum will carry forward for the next couple of quarters is enough of a reason to be a buyer of the railways at this juncture, there are also sound arguments to be long the sector in the long run. At least that's the thinking behind J.P. Morgan's recent move to set-up a $1.5 billion global railways stock fund. As government policies continue to move toward addressing environmental concerns, moving freight by rail is likely to be favored over road transport, due to its lower carbon footprint. Railroads burn less diesel than trucks for each ton of cargo carried.

The Bottom Line
After experiencing a modest correction sell-off in February, the railways shares are up by roughly 30-35% percent. While a fair amount of this run-up can be attributed to a change in sentiment prompted by Mr. Buffett's well-timed acquisition of Burlington Northern, continuing improvements in the industry's fundamental should form the foundation for further gains from this point forward. And right now, there's every sign that those fundamentals will continue to improve. (For related reading, take a look at Think Like Warren Buffett.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing Basics

    Building My Portfolio with BlackRock ETFs and Mutual Funds (ITOT, IXUS)

    Find out how to construct the ideal investment portfolio utilizing BlackRock's tools, resources and its popular low-cost exchange-traded funds (ETFs).
  3. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  4. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  5. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  6. Investing

    3 Things About International Investing and Currency

    As world monetary policy continues to diverge rocking bottom on interest rates while the Fed raises them, expect currencies to continue their bumpy ride.
  7. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  8. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  9. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  10. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center