The Dow Jones Transportation Average

Halloween in Salem

The Dow Jones Transportation Average

United Technologies (UTX)

When I was growing up here in Salem, Massachusetts, decades ago, Halloween was not the big deal it is today. Sure, we kids went Trick-or-Treating (and I loved the candy like every kid), but back then, Salem didn’t have the tourist industry it has today.

Now, with Haunted Happenings bringing witch-crazy visitors to the city the entire month of October, Halloween (and everything that precedes it) is a major event for the city, and a big moneymaker, too.

Some adults love to complain about it, but I embrace it, mainly because it’s more fun. So Friday night (for the fifteenth year), I’ll put on my Chewbacca suit, and give out candy.

Yes, that’s me.

In the process, I’ll scare some little kids, have my picture taken with some bigger ones, and generally have a good time, not least because most people have no idea that inside that hairy suit is a gray-haired pillar of the community!

If you see me Friday night, say hi!

Dow Jones Transportation Average.

The oldest stock index in use today is the Dow Jones Transportation Average. Created in 1884 by Charles Dow, it was originally composed of nine railroads and two non-rail companies (Western Union and Pacific Mail Steamship Company.) In the early days, it was often called “The Rails.”

Nowadays, you don’t hear much about it.

But it’s worth remembering that in the middle of the nineteenth century, those railroads were hot stuff, the fastest-growing industry in the world.

And their stocks were in great demand, just like radio stocks in the 1920s and Internet stocks in the 1990s.

All three of those industries brought a revolution that made commerce and communication more efficient than ever before.

As they changed the world, people became excited about the future, and bid their stocks up to extreme heights. Early investors got rich.

And after the peak, came the fall-even while the industries continued to grow!

Here’s a chart showing the prices of English railway companies versus non-railways in the middle of the nineteenth century.

It takes quite a bit of time for stocks to cool off after such red-hot runs, but those booms periods are fun while they last-which is why I spend a lot of time thinking about the Next Big Thing. Will it be solar power, social media, cloud computing, self-driving electric cars, 3-D printing, genetic medicine or something else?

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Anyway, I’m writing about trains today not because I have a railroad stock to recommend but because I recently went hiking on an abandoned railway track that went straight up a mountain. And along the way I found a stock.

Named the Prospect Mountain Incline Railway at Lake George, New York, the railway was built in 1895 to bring tourists to the hotel at the top of the mountain.

The hotel, named Lake House, had been bought the previous year by William M. Peck of Glens Falls, New York, who then joined with Addison B. Colvin (the treasurer of New York State) to build the railway.

The track ran 6,780 feet from the lower station to the mountaintop, rising 1,950 ft. above Lake George. And on it ran two cars (one going up and one going down), which balanced each other and were linked by a strong cable attached to a steam engine on top of the mountain.

In its first week of operation, the railway carried 30,000 people!

Here’s a diagram of the cars, which had “seating accommodations for 54 passengers while 80 or 90 persons can be accommodated by standing.”

And here’s a photo of one of the cars near the mountaintop.

Sadly, the railway ran for only eight years! Demand fell, the rail bed deteriorated, and the rails were removed for scrap in World War I.

Here’s my photo of the track today, which is notable for the multitude of rocks.

Still, some players in the enterprise live on.

Otis Elevator

One is Westinghouse, which furnished the electric components of the railway. Westinghouse is now a unit of CBS Corporation and (among other things) it builds and operates roughly half the world’s nuclear power plants.

The other is Otis Elevator, whose forerunners built the rail track, engines and safety devices on Prospect Mountain.

Today, Otis is world’s leading manufacturer of elevators, escalators and moving walkways, getting an amazing 82% of its revenues from outside the U.S. And the prospects are bright for Otis! In 2012 the company-which has 61,000 employees around the world-secured its largest contract to date, supplying 349 elevators for the Hangzhou, China, metro. But that contract was topped the following year when Otis won a contract to supply 670 elevators and escalators to the Hyderabad, India Metro.

If you think India and China will continue building lots of metros with Otis escalators, as well as lots of skyscrapers with Otis elevators, Otis is probably a fine long-term investment.

But you can’t buy Otis today.

What you can do, however, is invest in its parent company, United Technologies (UTX), which acquired Otis way back in 1976.

United Technologies (UTX)

UTX was recently recommended by Roy Ward of Cabot Benjamin Graham Value Investor, who says the stock is a good value if bought below his Maximum Buy Price.

Here’s some of what Roy wrote to his subscribers.

“United Technologies is a multi-industry holding company that conducts business through five divisions: Otis Elevator; UTC Climate, Controls & Security; Pratt & Whitney; UTC Aerospace Systems and Sikorsky Helicopters.

“Sales for the company as a whole increased 4% to $65 billion during the 12 months ended 9/30/14, while EPS rose 16%. Strong demand for many of United Technologies’ products and services was partially offset by divestitures of slower growing, less profitable segments. Management’s cost-cutting programs also bolstered earnings. Sales will likely climb 5% and EPS will advance 13% in the next 12 months to $7.50. The company’s broad product mix, and substantial and steady parts and service business will provide dependable growth in future years. UTX has paid dividends consecutively since 1975 and has increased its dividend each of the past 20 years. Another dividend hike is expected by the end of 2014. The company’s payout ratio (dividend divided by earnings) is 36% which is well below my 50% upper limit. United Technologies is another blue-chip company that is well worth buying for long-term investment. I expect UTX to reach my Min Sell Price within one year.”

So, you could just buy UTX here, but I don’t recommend that. The key to profiting with value stocks is to buy only when a stock is selling below its Maximum Buy Price and to sell only when a stock is trading above its Minimum Sell Price. That’s how you invest with a Margin of Safety.

And all you need to know those critical numbers for UTX is to join Roy’s satisfied readers.

For more details, click here.

Yours in pursuit of wisdom and wealth,

Timothy Lutts

Chief Analyst, Cabot Stock of the Month 
Publisher, Cabot Wealth Advisory


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