Railroads are an attractive business. Barriers to entry are high, substitutes are disadvantaged, pricing power is favorable, and long-term demand is reliable. Railroads also benefit from powerful operating leverage. Operating leverage turns small revenue increases into big earnings gains. In the last year, a few of the major railroads turned a 15% revenue gain into a 60% increase in operating profit. Of course, operating leverage works in reverse when revenues decline, but over time, revenue growth in the railroad industry mirrors GDP growth.

Burlington Northern (NYSE: BNI) is the only major railroad that is still reporting volume growth during the housing recession. The railroad hauls more grain products than any other railroad, including grain for ethanol, and ethanol itself. Burlington Northern is also a big mover of low-sulfur coal. The company hauls enough coal to light up 10% of the nation's homes.

Canadian Pacific (NYSE: CP) was the first transcontinental railroad in North America, and today it is the region's sixth-largest railroad by revenue. Canadian Pacific is making aggressive moves into the energy transportation business. The company has plans to lay new tracks into Alberta's oil sands processing area, and a recently announced acquisition of Dakota, Minnesota & Eastern Railroad (DM&E) will allow Canadian Pacific to build new tracks into the coalfields of Wyoming's Powder River Basin. DM&E also provides Canadian Pacific with exposure to the grain-and-ethanol transportation business.