Age-old industries, like
railroads, appeal to some
money managers

NEW YORK » Cement. Railroads. Trucking. Steel. These aren't sexy businesses, but they have something that adds to their appeal in the current investing climate: pricing power.

Unloved for years, old economy industries have piqued the interest of value-minded investors who say there's a growing need for the goods and services they provide. Asia's humming economic growth is the most obvious factor, but there's another point in their favor -- their own troubled pasts. Hard times have left only a few survivors in these deeply cyclical industries, so there's not a lot of competition as business heats up. But there's not much buzz about their future, either.

"If you were to get 1,000 investors together today and say, 'How many of you would like to hear about Burlington Northern Santa Fe?' you wouldn't have many takers because the image of the railroad industry is based on what it used to be," said Don Hodges, president of Hodges Capital Management Inc. in Dallas. "But if they make money year to year to year, that image will improve."

Flashback to the year 2000: Wall Street was bored with old economy stocks; growth and high-tech were an obsession. But as competition grew, pricing pressures developed, margins declined and it became more difficult for the new economy names to make money. The legacy of that time can be seen in the communications industry today, where many players are scrabbling for the same business, and it's unclear which will survive. There's almost no doubt some will fail.

Compare that with old-fashioned industries that for years had too much capacity. As these businesses flagged, their infrastructure declined and many companies went broke.

"It's almost a self-correcting process," Hodges said. "One day you wake up, and there's a shortage of capacity, a shortage of plants and products that you need to service industry. So all the sudden those companies that are left begin to have pricing power."

It's happening in cement, steel and transports, Hodges says. But it might be a while before you hear about it from your broker, because Wall Street just isn't that excited about it yet.

"My contrarian antenna goes up when I see areas of the market where price action is strong, where earnings trends have been favorable and Wall Street hasn't jumped on board," said Bernie Schaeffer, chairman of Schaeffer's Investment Research in Cincinnati. "Sometimes it takes a while between the time a beaten down industry starts to really regain its health and Wall Street re-orients its thinking ... and it's in this environment that investors have opportunities for good returns."

Wall Street hasn't hurried to paste "buy" ratings on these stocks, in part because many analysts believe rising demand for basic materials, pricing power commanded by railways and tightness in the trucking industry are temporary conditions. Some also think the stocks are already overvalued -- a point Hodges and others dispute. But given the pace of global growth, economists say business is likely to be strong for a while.

"I think these conditions will linger," said Michael Gregory, senior economist at BMO Nesbitt Burns of Chicago. "While you could get a healthy correction ... we're in a multiyear period where these industries are going to do very well. They probably don't get the respect they deserve."

One thing that works in their favor is it's likely to take much longer for competition to develop in these industries than it did among the high-tech concerns, because such a large infrastructure commitment is required. For example, Hodges said, it can take years to get a permit for a cement plant, then even longer to actually build one. That's good news for cement and aggregate rock producers already in business, such as Texas Industries Inc., Eagle Materials Inc. and Vulcan Materials Co.

Hodges, who started out as a broker with Merrill Lynch in Oklahoma City in 1960, later opened his own firm, and last month won a performance award from Lipper Inc. for delivering consistent returns through his mutual fund, has an eye for undiscovered trends.

He started noticing potential in the railroad industry about a year ago. Burlington Northern had proposed a rail overpass in Canadian, Texas, the small panhandle town where Hodges was raised, and which he keeps tabs on through a subscription to the local newspaper. Having worked for the railroad as a boy, he remembered about 20 trains passing through the sleepy town each day; Burlington Northern was planning runs every 18 minutes.

After doing some research, Hodges found the rail business had become an unlikely beneficiary of the import boom; the gigantic freighters used to transport goods from China were too large to squeeze through the Panama Canal. Instead, the ships were arriving at western ports, like Long Beach, Calif., and imports were moving across the country by train. Also boosting business, the high price of natural gas has led many utilities to generate electricity by coal instead, which is shipped by rail. Truckers are part of the picture too, using trains to move goods across the country in containers, then ferrying them away from rail lines.

"Practically overnight, it (Burlington Northern) began to do well," Hodges said. "And I was not seeing any write-ups in the brokerage industry about it. So I thought, 'Hey, there's something going on here that has not made the papers yet."'

Burlington Northern is now one of the top 15 holdings in the Hodges mutual fund, which he manages with his son, Craig D. Hodges; they also have a small position in rival Union Pacific Corp. which has not been as successful, but which he thinks "potentially could be a turnaround situation." And he's eyeing Canadian National Railway Co., but hasn't invested in it yet.

Their top holding is in steel, an industry devastated by years of bad fortune. Now that global demand is on the rise, the few companies that remain, such as Commercial Metals Co. and United States Steel Corp. finally have some pricing power.

"These are cyclical industries, meaning, they'll have periods of prosperity and periods where they don't do well," Hodges said.