WASHINGTON, D.C. – Despite a punk economy, things don’t look so bad for the railroads these days. Though down for the past 12 months, rail stocks in the S&P 500 have beaten the broader index’s performance by 16%. Look back two years, and that spread widens to 59%.

So what’s to like? For one, industrywide financials seem fairly steady. Value Line estimates that revenue will increase 3% by the end of 2003, while net margins, or net income as a percentage of sales, will increase to 9.5%. That’s up an impressive two and a half points since 1998.

Another plus is this: Big rail has an unusually powerful position in Washington. Vice President Dick Cheney sat on the board of directors at Union Pacific until he took office. New Treasury Secretary John W. Snow was the chief executive at CSX. Nor does the industry simply rely on the Administration’s railroad men. In November, for example, the Association of American Railroads (AAR) tapped Republican Bud Shuster, the former chairman of the House Transportation and Infrastructure Committee and a 28-year congressman from Pennsylvania, to lobby for it on transportation and tax issues.

Big rail has shown little hesitation to open its wallet, mostly to Republicans. By the Center for Responsive Politics’ tally, rail companies ponied up $4.3 million during the 2002 election cycle. Union Pacific topped the list of contributors with $1.7 million, 84% of which went to Republicans.

The big carriers’ lobbying machine exists, among other reasons, to protect the regulatory status quo. Visit Union Pacific’s Web site, for example, and you’ll find a position paper from the company on the Staggers Rail Act and the deregulation it brought to the railroads in 1981. After trotting out a raft of statistics on improving safety and productivity, the paper then warns that “these gains are threatened by legislation sought by some special interest groups that would impose new regulatory burdens on railroads.”

So who are these special interests? Primarily disgruntled customers in the energy, commodities and chemical industries. Banded together in groups such as Alliance for Rail Competition (ARC) and Consumers United for Rail Equity, they pull out their own statistics to argue that freight carriers have effectively acquired monopoly control, leaving many customers “captive” to a single railroad. By their figuring, $11 billion worth of freight each year is shipped by such captive customers.

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A valuation gap still exists between U.S. and non-U.S stocks. Relative to ten years ago, for example, the S&P 500 ‘s price has appreciated 92% versus 21% for Morgan Stanley Capital International’s EAFE index of stocks from developed economies in Europe, Australasia and the Far East.

Could that gap close? As the euro’s recent rise might suggest, there’s evidence of a growing appetite for non-U.S. financial assets. And it ‘s not hard to argue that U.S. stocks have plenty of room to fall. Based on reported earnings, the S&P 500 now has a trailing 12-month price-to-earnings ratio (P/E) of 29. In early 1995, as the last bull market began its climb, that ratio stood at 16. Hardcore bears say that even the multiple from 1995 looks too rich, arguing that down markets usually don’t grind to a halt until earnings multiples bottom out in the single digits.

The bears could always be wrong, but it still may be prudent to make a couple of bets on non-U.S. stocks. For U.S. investors, American Depositary Receipts (ADRs) are the easiest way to do so.

Listed on American exchanges, ADRs are certificates issued by U.S. banks acting as the depositary for shares in the non-U.S. companies. They provide American investors with the same economic benefits as regular shareholders, including dividends.

Example: Cadbury Schweppes. At a recent $23, ADRs for the London-based beverage and candy concern trade at just nine times trailing earnings per share. That looks very reasonable next to PepsiCo’s trailing multiple of 23. Coca-Cola sells for 24 times trailing profits. And compared to its U.S. rivals, Cadbury shares are also cheaper relative to book value and sales.

Full story at Forbes.com