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The flip side to the rise of Amazon.com (ticker: AMZN) and other online retailers is the decline of all those bricks-and-mortar operators.

And the misery of all those declining stores is shared by their landlords, a fact not lost on a number of hedge funds that see a short-selling opportunity in the making.

While mall and shopping center operators have been struggling for years, there’s a feeling among many professional investors, Bloomberg reports, that things will get worse and that many real-estate investment trusts and other operators may soon “buckle under their debts, much the way many homeowners did nearly a decade ago.”

Bloomberg’s Rachel Evans and Matt Scully write that “with bad news piling up for anchor chains like Macy’s (M) and J.C. Penney (JCP), bearish bets against commercial mortgage-backed securities are growing.”

In recent weeks, they continue, firms such as Alder Hill Management — an outfit started by protégés of hedge-fund billionaire David Tepper — have ramped up wagers against the bonds, “which have held up far better than the shares of beaten-down retailers.”

By one measure, short positions on two of the riskiest slices of commercial mortgage-backed securities, or CMBS, surged to $5.3 billion last month — a 50% jump from a year ago. One common way to short CMBS is by buying derivatives, which amounts to a form of credit protection in the event that they default.

The article however takes pains to put this budding credit crisis in perspective. “Nobody is suggesting there’s a bubble brewing in retail-backed mortgages that is anywhere as big as subprime home loans, or that the scope of the potential fallout is comparable,” the article states. “After all, the bearish bets are just a tiny fraction of the $365 billion CMBS market. And there’s also no guarantee the positions, which can be costly to maintain, will pay off any time soon. Many malls may continue to limp along, earning just enough from tenants to pay their loans.

“But more and more, bears are convinced the inevitable death of retail will lead to big losses as defaults start piling up,” the article adds.

It’s worth noting that these hedge funds are focusing their short bets on the credit rather than the stocks of these mall operators. That shouldn’t be a surprise, given that many of the shares of the largest REIT operators have been falling steadily in recent weeks. In other words, the decline in these stocks is already old news.

For stock-oriented investors, the best step might be simply to avoid buying into the retail REIT sector, or to sell off stakes, rather than attempting to short it. That may be a passé trade at this point.

While bricks-and-mortar retail might seem like a sector relegated to the past century, the same can’t exactly be said for railroads, even though the industry arguably saw its best days over a century ago.

An interesting piece by Morningstar makes the case that railroads could be the ultimate back-to-the-future trade.

“While freights have changed and CEOs have come and gone, these businesses continue to transport goods across North America,” writes Morningstar. “It’s this constant presence that makes railroads an ideal holding for long-term investors, says Keith Schoonmaker, Morningstar’s director of industrials equity research.”

To be sure, in 2015 and 2016, total rail-traffic volume dropped by 2.3% and 5%, respectively, due to falling energy and coal demand. Declining coal usage, in particular, has ravaged a number of companies.

And the volume falloff has impacted stock prices, with the S&P 500 Railroad sub-index dropping 21% between November 2014 and January 2016, according to Morningstar.

But the article points out that railroads are in the midst of a minor resurgence.

“Volumes have started to rise again, up 8.3% year over year, while coal volumes have also climbed by 16% year to date,” adds Morningstar. “While coal’s dominance isn’t coming back, says Schoonmaker — utilities will ultimately continue using cheaper and cleaner natural gas over coal — the recent increase in coal volumes are giving some rails, in particular eastern railroads like CSX (CSX) and Norfolk Southern (NSC), a bit of a boost.”

The article suggests that railroad volumes in general should grow in line with the U.S. gross domestic product, with most of its product lines growing at a modest pace.

“However, intermodal transport — or shipping that involves multiple modes of transportation, such as ships, trucks, and trains — is a bright spot for railroads, says Schoonmaker. He thinks intermodal industry gross revenues should expend by 5% on average between 2017 and 2020, while container volume growth will climb by about 3.5%.”

Schoonmaker says that trucks may be faster and offer point-to-point service, but “rails are cheaper and greener and have ample capacity. And if each train is pulling 200 containers instead of one, you can see how the economics can be in favor of rails.”

Another point: It may also be a good time politically to own railroads. “Unlike other industrial companies, railroads invest billions of dollars into their businesses every year, mostly to fix tracks, cars, and improve rail-related infrastructure. About 16% of a company’s revenue is reinvested annually, says Schoonmaker, which is a much higher rate than other transportation companies, including United Parcel Service (UPS).”

One drawback to these stocks, however, is slightly elevated valuations. “According to Morningstar’s Market Fair Value chart, the average railroad stock in Morningstar’s coverage universe is trading about 3% above Morningstar’s fair value estimate, suggesting that it’s fairly valued,” adds Morningstar. “However, the railroads aren’t really like other transportation stocks, which is one reason for the higher valuation levels. Railroads have an almost impenetrable moat — no one’s building a new cross-continent railroad system.”

One railroad stock that is high on Morningstar’s list is Union Pacific (UNP), which is trading at a 3% discount to fair value as of this writing, according to Morningstar, and offers a 2.2% yield.

Email: john.kimelman@barrons.com

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