CSX-Union Pacific stock trading, which one will outperform other?

CSX has risen 16 percent since March 23,2011

New investors are attracted to CSX as CSX’s coal shipments show signs of stabilizing.The number of coal carloads CSX transports was up 3 percent for the week ended Oct. 4 from same period a year ago after years of contraction.

Since March 23, 2011,CSX has risen 16 percent, compared to Union Pacific’s 119 percent gain. Even though the  stock-price ratio is close to the lowest since 1981, it’s up 0.8 percentage points this month, the biggest increase in a month. The point is whether investors will start putting more capital into this trade now that it’s at a multidecade low.

“Fewer coal-related headwinds have been the overarching driver”said Ben Hartford, an analyst with Robert W. Baird & Co. in Milwaukee.

Based on Jacksonville, Florida,CSX is generating 24 percent of total 2013 revenue transporting coal and is more dependent on this commodity while Nebraska-based Union Pacific generates 19 percent.
CSX stock lagged behind Union Pacific because of declining the price of natural gas which made it cheaper alternative for utilities.

Union Pacific hauls primarily Powder River Basin type coal, which is cheaper than CSX’s Appalachian variety, so it's volumes declined less.

 CSX stock could “narrow the gap” with Union Pacific as coal becomes a “less significant headwind” for CSX, Hartford said.

Jim Stellakis, founder and director of research at Technical Alpha Inc. in Greenwich, Connecticut, said that the pair-trade ratio could “move sideways” for a few months before there’s a clear sign that a possible downtrend in place since 2011 has broken. If ratio goes up overcoming a recent high in January 2014 -- “that’s a good sign there’s a switch under way, as investors are starting to see more value in CSX relative to Union Pacific.”

Investors like Timothy Ghriskey, chief investment officer at Solaris Asset Management LLC in New York, does not follow the bet because his company currently hols Union Pacific. CSX has been plagued by congestion on its East Coast rail network, Ghriskey said. The company increased hiring and capital spending to alleviate this. Also that it relies more on the export market for coal, specifically China, where demand has been weak.
Still, the performance gap between these two stocks could reverse, as it has in the past, said Hartford, who maintains a neutral recommendation on Union Pacific and an outperform on CSX.

Driven largely by it's higher margin, CSX outpaced Union Pacific, between 2002 and 2008.
CSX is scheduled to report third-quarter results Oct. 14, followed by Union Pacific on Oct. 23. The implied one-day stock-price move after the announcement is about 3.5 percent for CSX.
Ghriskey said “pair trade is certainly something to watch,” even for investors with a position in only one of these stocks,