Warren Buffett famously loves companies with moats.
The presence of protective moats around his holdings is one of the main reasons he’s outperformed over the years.
Moats are relatively easy to recognize and understand, compared to the more complex qualities Buffett likes – such as low discounted cash flow valuations or supreme earnings quality. This is one reason why I like to look for strong moat companies all the time when considering stocks to own and suggest.
Simply put, moats derive from some characteristics that protect a company from competition. It can be a powerful brand, like at Coca-Cola (KO), or a technical know-how advantage like at Tesla (TSLA). It can be some quality that simply makes it difficult for competitors to enter a business – like with railroads, which are hard to replicate. Buffett likes the railroad moat so much, he bought BNSF Railway outright in 2010.
My Own Twist: A Strong Moat Plus Insider Buying
A powerful combination I have used over the years is when insiders are buying large amounts of stock in a company with a moat.
That’s exactly what we have with the railroad CSX (CSX). CSX has a strong moat because it’s nearly impossible to create a new railroad. Not only would it be expensive to build out a network of tracks, you’d also have to get easements to use property throughout a region or across the country. Not happening anymore, compared to the early 1800s when railroads were first built out in the U.S. Sure, railroads compete with trucks and airplanes in shipping goods. But railroads have a big cost advantage, and their pricing tends to hold up well in recessions.
Originally founded in 1827 as the Baltimore and Ohio Railroad Company (B&O), CSX now has about 20,000 miles of track serving 26 states east of the Mississippi River. It has access to over 70 port terminals. This reach helps it ship the goods of manufacturers, including those in the automotive sector, farmers, wholesalers, retailers, and energy producers.
5 Bullish Factors for CSX Corp. (CSX)
Beyond the moat, here are five factors that could move CSX shares higher from here.
* CSX is advancing its “precision scheduled railroading.” That’s a fancy way of saying it is improving and targeting its mix of assets – like yards, locomotives and rolling stock – to boost efficiency and profitability.
* CSX has finally finished two large infrastructure projects that were creating cost headwinds. Now, CSX’s operating ratio, or expenses divided by revenue, has a better chance of improving.
* CSX continues to be a takeout candidate following the agreement by Union Pacific (UNP) to buy Norfolk Southern (NSC).
* An activist investor continues to pressure CSX to implement tactics it thinks will make the stock go up (more on this, below).
* CSX has balance sheet strength and strong cash flow. This supports the stock in downdrafts, and it also backs the 1.45% dividend yield.
The Insider Buying
CEO Steve Angel recently bought $2 million worth of stock at around $36.80. This is both a size buy and a C-suite purchase, both good qualities to look for in insider buying analysis.
One potential demerit might be that Angel is a new CEO who just took the helm here. That means his buying might be part of his employment contract. I don’t see this requirement in the CSX 8-K filing announcing his hiring, but the actual employment contract is not yet available.
Even if he was required to buy stock, I never really consider this dynamic to be a negative. After all, Angel probably had a lot of options for his next gig. If he was required to buy stock, he knew it going in, and he went ahead anyway. So, the buying is still a signal that he likes the prospects for CSX.
The Activist Angle
Angel came in as part of an activist investor campaign by Ancora Holdings Group, which owns a stake here. Ancora had been on a quest to oust outgoing CEO Joe Hinrichs, who Ancora thinks did a poor job. It has a higher regard for Angel, who brings experience as the CEO of Linde (LIN) and in various management roles during his 22 years at General Electric (GE).
In a letter lauding the CEO transition, Ancora says it continues to buy CSX stock. A larger position gives Ancora more leverage in its campaign to encourage management tactics that may boost the stock.
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