Railroad Stocks on Fast Track Ahead of Earnings

Railroads have been a bright spot in the otherwise lagging transportation sector in 2019, with the three biggest players posting bull market and all-time highs. Strong commodity prices, the 10-year economic expansion, and domestic exposure have underpinned the rally, attracting investors seeking a safe haven from trade wars. Of course, the group is also levered to U.S.-Mexico commerce, but receding tensions with our southern neighbor have given these issues a lift as well.

The good times may continue after second quarter earnings, which start with CSX Corporation (CSX) on July 16. Union Pacific Corporation (UNP) follows two days later, while Norfolk Southern Corporation (NSC) reports on July 24. The smaller but equally interesting Kansas City Southern (KSU) is scheduled for July 19 after a quarter that may have lifted the dark cloud of Mexican tariffs and border closings.

Chart showing the share price performance of CSX Corporation (CSX)

CSX Corporation is expected to report earnings per share (EPS) of $1.11 on $3.15 billion in second quarter revenues. A multi-year uptrend stalled in the mid-$70s in August 2018, giving way to a topping pattern, followed by an October breakdown that relinquished 18 points into late December. The 2019 bounce unfolded at a similar but opposite trajectory, lifting into range resistance in April. A breakout stalled after one day, yielding sideways action into the third quarter.

The on-balance volume (OBV) accumulation indicator tells a different story than price action in the past 11 months, topping out in August and entering a persistent distribution phase that has hit a 14-month low even though the stock is trading just five points under the all-time high. This bearish divergence increases risk substantially into next week's report, raising the odds for a failed breakout that exposes the 2018 low.

Chart showing the share price performance of Union Pacific Corporation (UNP)

The second quarter consensus for Union Pacific Corporation has now settled at EPS of $2.15 on $5.63 billion in revenues. The stock broke out above the 2015 high near $125 in December 2017, entering an uptrend that stalled above $160 in September. The fourth quarter sell-off carried 37 points to an eight-month low, ahead of a 2019 bounce that reached 2018 resistance in February. It broke out immediately, entering a testing period that is still in progress five months later.

OBV hit a multi-year high with price in September 2018 and turned tail, also dropping to an eight-month low in December. Buying impulses since that time have failed to reach the prior high, generating a less pronounced bearish divergence than CSX. Even so, broad distribution points to sector-wide caution that could add considerable downside if railroads fail to meet second quarter expectations or tensions with Mexico flare up.

Chart showing the share price performance of Norfolk Southern Corporation (NSC)

Norfolk Southern Corporation should report EPS of at least $2.80 on $2.96 billion in second quarter revenues. A 2017 breakout gained considerable traction, lifting to $187 in September 2018, ahead of a steep decline that carried more than 40 points and 23% into December. The stock bounced to the prior high in March 2019 and broke out a few days later, lifting into April's all-time high at $211. It has been pulling back in a bull flag since that time and is now testing the breakout level.

Accumulation-distribution readings are the strongest in the railroad sub-sector, hitting an all-time high with price in the second quarter of 2019. Norfolk Southern has been under minor distribution since that time but is still well positioned to post new highs after earnings. Just keep in mind that the pullback that started after the first quarter release has now reached the April breakout level and will set off sell signals if it violates the June 25 low at $188.

The Bottom Line

Railroads are trading at or near all-time highs and could add to gains after second quarter earnings. However, bearish volume divergences may come into play if the railroad companies don't meet or exceed expectations, adding considerable downside pressure to a reversal.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

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