Key Points

Railroad stocks got a boost from news of a trade deal, raising investor hopes that there will not be a prolonged slowdown in imports. Investors should be cautious about buying into this rally, as it could take time for volumes to recover. 10 stocks we like better than Union Pacific ›

Weekend progress toward resolving the trade spat between the United States and China has markets rallying, and railroad stocks are among the big winners.

Shares of Union Pacific (NYSE: UNP), CSX (NASDAQ: CSX), Norfolk Southern (NYSE: NSC), Canadian Pacific Kansas City (NYSE: CP), and Canadian National (NYSE: CNI) were all up more than 5% as of 11 a.m. ET.Image source: Getty Images.

Get the railcars moving again

Railroad stocks are highly sensitive to trade, since most of the goods that are offloaded at ports spend some time on trains before reaching their final destinations. The talk of ports going quiet as China and the U.S. raised tariff rates on imports spooked investors in the sector, putting the shares under pressure.

On Monday, markets are rallying on the hope that the worst is now behind us. Over the weekend, the U.S. and China scaled back recent tariff escalations for at least 90 days after making progress toward a trade deal.

The two sides still have work to do to reach a final agreement, but President Donald Trump said he expects to talk to China's President XI as soon as this week.

The rail companies all have strong operations and can weather a short-term slowdown, but investors are still relieved that we might not have a prolonged slowdown in imports.

CSX got an extra boost after the company agreed to a new five-year tentative agreement with the Brotherhood of Locomotive Engineers and Trainmen, a union that represents nearly 15% of the company's total workforce.

Is now the time to buy railroad stocks?

It has been a rough few years for the rail sector, hit by volume declines as large customers braced for a potential economic slowdown. Even with Monday's rally, these stocks are all down between 10% and 25% from their recent highs.

An end to the trade war would be a positive, but investors should note that these companies had provided tepid guidance for the year even before the early April "Liberation Day" tariff announcements. Retailers are likely to remain at least somewhat cautious in the weeks to come, which could limit volume gains.

For those interested in buying in and riding out the turbulence, Canadian Pacific Kansas City is an intriguing candidate. The company is the smallest of the major North American railroads but just completed a transformative deal, and has the opportunity to grow market share should it integrate its new holdings successfully.

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Lou Whiteman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Canadian Pacific Kansas City and Union Pacific. The Motley Fool recommends Canadian National Railway. The Motley Fool has a disclosure policy.

Why Railroad Stocks Are Moving Higher Today was originally published by The Motley Fool

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