Penn Wealth Publishing

2018.11.04 Penn Wealth Report Vol 6 Issue 04

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04 Nov 2018 PeNN Wealth RepoRt volume 6 issue 04 19 Penn Wealth RePoRt Copyright 2018. All Rights Reserved. Weekly BusiNess RepoRt Weekly BusiNess RepoRt —Mencius a tale of tWo railCar makers: the diver- geNCe of triNity aNd ameriCaN railCar I love railroads; everything about them. From the smell of the tracks to the great role they have played in American history. That is one of the reasons it was upsetting when Warren Buffett stole one of the great American railroads— Burlington Northern (formerly BNI)—from the publicly-traded world and added it to his Berkshire Hathaway shelf like a billionaire's toy. From an investment standpoint, railroads aren't the only way to play the industry; there are a few companies which dominate the railcar manufacturing segment. For years, our favor- ite investment in this space has been Trinity Industries (TRN $19-$23-$28), a $3 billion indus- trial company which not only makes railcars, but also equipment and supplies for the energy, agri- culture, and construction sectors as well. A secondary player in the space is American Railcar Industries, Inc (ARII $35-$70-$70), which had a market cap of just $900 million a month ago. Going into the horrendous month that was October, we didn't own either of these compa- nies, but both had single-digit PE ratios. Then something happened. Activist investor Carl Icahn, through his Icahn Enterprises hedge fund, owns about 60% of ARII. On the 22nd of October, as the markets were in the midst of their correction, Icahn announced that the company would sell itself to a subsidiary of private equity firm ITE Management. Square in the middle of the October carnage, American Railcar spiked 50% in one day, doubling its mar- ket cap. This action spooked Trinity investors, causing an arguably better company to lose about one-third of its value in a matter of days. When the dust settled, Trinity had a PE ratio of 5, while ARII's was about double that. This is such a great lesson for investors. While the rather dour Efficient Market Hypothesis (EMH) claims that all public knowledge about a firm is already baked into its stock price, this sur- prise action shows how the "right call" can create real wealth for shareholders in a matter of hours. It also underscores the importance of doing your homework—or hiring a professional to do it for you—with respect to individual sectors and industries. What did we do after the fact? We added out-of-favor Trinity Industries back into the Penn Dynamic Growth Strategy. Quotes of the Week (For more, visit our blog at PennWealth.wordpress.com) "Decide firmly what you will not do, and you will be free to do vigorously what you ought to do." Attribution: 1689, by Godfrey Keller, Public Domain "My powers are ordinary. Only my application brings me success." —Sir Isaac Newton "What isn't nailed down is mine. What I can pry loose is not nailed down." —Collis P. Huntington (19th century railroad baron) Humor (perhaps) Action Environment Focus 371-289 BC, public domain road & rail Public Domain

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