It's a full-on railway rebound

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Railway stocks have been making a mockery of some of the more tempered views from analysts in recent weeks. These stocks have a strong correlation with economic activity, and so it might come as little surprise that fears of a U.S. recession had been hitting some names particularly hard in recent months. Heading into the start of October, Canadian Pacific Railway Ltd. was down 33 per cent from its high earlier in the year; Canadian National Railway Co. was down 16 per cent.

But what a difference a month makes. CN has now risen 13 per cent from its low and CP – long seen by observers as CN's not-as-successful little brother – has surged 25 per cent.

And in the U.S., Union Pacific Corp. has risen about 22 per cent, with its third quarter results on Thursday helping to support those gains: Earnings rose 19 per cent over last year, to $904-million (U.S.) or $1.85 a share, beating estimates.

Whoa! This certainly contrasts with some of the gloomier reactions from analysts in recent weeks, where the number of "hold" recommendations on CP and CN have been greater than the number of "buy" recommendations. In the case of CP, the average target price has come down to $64 from $75 at the start of the year – a 15 per cent cut.

Blame it on the economic outlook. Raymond James Ltd. analyst Steve Hansen put it this way in a note in early October: "While we continue to believe the long-term outlook for Canadian railroads remains bright, recent downward revisions to global economic growth suggest the downside risk to the sector has increased materially, mitigating much of the upside reward, in our view."

Meanwhile, Cameron Doerksen of National Bank Financial recently trimmed his target on CP to $58 from $61.50. And David Newman of Cormark Securities cut his recommendation to "market perform" from "buy" and reduced his target to $58 from $72.

In his third-quarter report on Thursday, though, Union Pacific's chief executive suggested that while economic growth remains slow, he doesn't expect a recession. CP and CN report their quarterly results on Oct. 25.