Buffett’s ‘Backdoor’ Income Play On The American Energy Boom

Oil and gas has always been a high-stakes game. But recent circumstances have created a wonderfully simple and promising backdoor investment into the infamously fickle industry — without all that extra risk.

Thanks to multiple factors, including newer technologies in crude oil extraction, the United States is on the track to independence in the energy market, expected to continue drastically decreasing imports in the sector in the near future. 

The obvious implication of this news is that stock in American oil producers has serious upside. But history screams at us that oil is far from a sure thing, and it’s hard to trust such an inconsistent sector. 

This brings us to the stealthy, more stable play on the situation. This increasing domestic crude oil supply in the U.S. is bound to put stress on a system that has been merely a supplement to Middle Eastern imports for years.

The capacity of the pipelines in place to transport all this crude oil is far too small to handle distribution alone during this rise in stateside production, and the federal government has decided not to build any more of them. This presents one particular avenue with a chance to bust into America’s recent oil fortunes. And if you needed more convincing, it’s a sector that has already earned investing guru Warren Buffett’s attention — and money.

I’m talking about railroads.

Warren Buffett is a fan of railroads for three main reasons — all of which limit risk and boost potential profits.

First, railroads have an economic moat — a barrier to competition — that Buffett values. Environmental impact statements and property rights of way would be difficult to obtain for someone trying to build a new railroad. Those challenges make building a new railroad prohibitively expensive and would take years to complete if someone did want to try.

Second, railroads are a green investment because they are an energy-efficient means of transportation. According to one study, using railroads to move freight is three times more fuel efficient than using trucks on the highway.

Third, Buffett believes that America’s economy will grow in the long run, and railroads will grow along with it as they are called upon to move more and more goods, including crude oil. This reasoning has prompted Buffett to invest heavily in railroads. 

Even better, railroads often pay solid dividends that steadily rise over time. 

And while Buffett’s rationale and the circumstances seem to scream “buy,” caution is still necessary. Simply mimicking financial geniuses has burned plenty of investors. That is the main reason I recently designed a trading system to leverage the financial foresight of guru investors like Buffett and my fellow StreetAuthority editors.

The system runs potential big-time winners that other experts have already hand-picked through three rigorous tests, eventually narrowing the field down to some of the most select, promising trading opportunities in the entire market. Every two weeks, I publish the most exciting new stock to pass all three tests in my Maximum Profit newsletter.

First, I only own stocks that are currently held in other StreetAuthority portfolios.

By focusing only on this group of stocks, I am able to reduce my universe of investments to just a handful that have already been researched and tracked by StreetAuthority’s top analysts. 

Second, I focus on “relative strength.”

You might not be familiar with that term but don’t worry, it’s easy. Relative strength simply compares the past six-months’ performance of a stock to the entire market. If a stock is rising faster than 70% of the market, then it passes this part of my test.
Third, I focus on a company’s cash flow. 

You might not be too familiar with cash flow either, but that’s OK… It’s ridiculously simple to understand.

Cash flow measures the amount of money coming into a business. Cash flow is the lifeblood of any company and is the money a business uses to buy new factories, pours into research and development, or delivers back to its investors with dividends and buybacks. 

Which brings us back to the railroads. 

One of my system’s most recent favorites was originally picked by StreetAuthority’s Nathan Slaughter (the Chief Investment Strategist for our High-Yield Investing advisory), and it takes advantage of this backdoor entry into the oil market. It passed all three of my tests with flying colors, and I highly recommend it to al.

In fairness to Nathan’s readers, I can’t give that ticker symbol away. But if history is any guide, you can rarely go wrong by following Buffett — and I think railroad stocks are a safe bet for income investors looking for a “backdoor” play on the U.S. energy boom. 

P.S. — If you’re looking to invest like Buffett — investing in simple businesses that dominate their industries and return billions of dollars to investors through dividends and buybacks — you stand to make a killing in the market over time. It works. In fact, the stocks in our latest report, “The Top 11 Legacy Assets Of All Time,” have delivered a total return of 242% over the past 10 years following this simple strategy. To learn more about our top picks for 2014 — including several names and ticker symbols — click here.