Merryn's Blog

How to play Buffett's biggest-ever investment

Warren Buffett is putting $44bn into railroad group Burlington Santa Fe Corp. You can't follow him in, as he's buying the whole company. But there are other ways into the sector.

Warren Buffett has gone shopping again. This time he's putting $44bn into rail group Burlington Santa Fe Corp. You can't follow him in, even if you wanted to, as he's buying up all of the 77.4% of the company he doesn't already own this is Warren's very own train set. But there are other ways into the sector.

Make no mistake Buffett means business on this one. He describes his biggest ever deal as "an all-in wager on the economic future of the United States". It finally ends the speculation over how and when he would make the "elephant-sized" acquisition he has promised for the last two years.

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The firm operates 32,000 miles of track with 6,700 locomotives, and hauls everything from grain to coal. Buffett has been drawn to the chance to "take advantage of a market that is soft at a time when the possibility for competitive bids is relatively low," as Tom Russo notes on Bloomberg.

Obviously Buffett has a good track record. And while we're not too excited about America's economic future right now, freight will have to pick up at some point as the global economy recovers. High oil prices also tend to make freight transport more attractive.

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So how can you follow him into the sector? One option is via a stock we first tipped back in April LB Foster (Nasdaq: FSTR). It makes all the rails, tie plates, spikes, screws and anchor bolts needed to build a rail network which also makes it a good play on President Barack Obama's plans for a 'rail revolution'.

The stock hasn't done much since we first tipped it. And although the forward p/e of 20 looks dear, it isn't that far off the 18.2 times that Buffett is paying at Burlington. Meanwhile, the price to earnings growth ratio is a modest 0.47, and the group even boasts a strong balance sheet.


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