TORONTO -- The Dow Jones transportation index, legend has it, was created nearly a century ago to give investors an indication of where the broader market was headed, the Globe and Mail reports.

Railways, in particular, are seen as early cycle stocks because information about carload volume is available weeks before sales data for the goods being shipped.

But don't look to railway stocks this time around to figure out when the economy will wake from its current slumber. That's because rail stocks never really went to sleep.

Montreal-based Canadian National Railway Co., in particular, has been behaving like a bull despite the general bear market. The stock is trading near its all-time high, up 33 per cent in the early year. It closed down 44 cents yesterday at $59 on the Toronto Stock Exchange.

James Valentine, an analyst with Morgan Stanley Dean Witter & Co. in New York, said investors have held on to their railway shares, despite selling off most other so-called Old Economy stocks.

"The question is, do they finally get around to picking off the [railways] or do they say these are fairly stable companies even in a slowdown?" asked Mr. Valentine, who has an "outperform" rating on CN shares.

While he won't guess what investors will do, Mr. Valentine said he thinks the time is right to buy CN shares even though the stock, which trades at almost 11 times earnings, is no longer considered a cheap relative to other major North American railways.

Mr. Valentine said CN is finally getting the valuation it deserves as the best-run and most efficient railway on the continent. He said CN's valuation is still attractive because railways are likely to show accelerated earnings growth coming out of a downturn.

"It's my favourite name in the rail industry. My mantra has always been if you're going to own a [railway], make it Canadian National. It's the best-run, with the best returns. It has the best future prospects."

But Doron Daniels, an analyst with Scotia Capital in Toronto, downgraded CN shares to a "hold" recommendation last week because the stock has become so pricey.

Mr. Daniels said the economic slowdown will have an impact on the company's earnings going forward. CN shares have fallen slightly since Mr. Daniels' downgrade.

So why has the stock done so well in recent months against the backdrop of a slowing economy and soaring fuel prices?

Winnie Siu, an analyst with Salman Partners in Vancouver, said railway stocks in general have been performing well as investors look for safe places to put their money. She said further interest rate cuts will continue to help CN.

"Fundamentally, CN is still very good. You might see some weakening of some revenue going forward because of the softening of the economy," Ms. Siu said. "But they are still a very well-run company and I think they will still try to offset lower revenue with other measures."

Like most other major railways, CN has raised its prices to offset the increase in fuel costs. And unlike companies in many other industries, railway companies have not had to give profit warnings -- partly because they are benefiting as power producers switch back to coal because of soaring natural gas prices.

Gary Yablon, an analyst with Credit Suisse First Boston, issued a report recently stating that he thinks the coal inventory restocking, which has been benefiting railways, will continue through the balance of 2001.

"While we are not making across-the-board [profit] estimate increases, we do see this as offering another level of cushion in a market where most other companies are preannouncing earnings shortfalls," Mr. Yablon wrote.

While CN does not ship as much coal as many of its competitors, the increase in coal shipments will still help to offset a decline in other revenue.

CN shares have also benefited from its pending merger with Wisconsin Central Transportation Corp. of Chicago. The deal, which is still subject to regulatory approval, would give CN about 3,500 kilometres of track, including an important missing link between Chicago and Western Canada. CN said it expects to realize $60-million (U.S.) in annual synergies from the merger.

Last year, U.S. regulators effectively killed a proposed $6-billion merger between CN and Burlington Northern Santa Fe Corp. of Fort Worth, Tex., out of concerns that it would force another round of rail mergers that would result in just two major railways in the continent.

The U.S. Surface Transportation Board also imposed a 15-month moratorium on any mergers between major railways.

With the moratorium set to expire in June, all eyes are back on CN to see if it will again try to merge with a major U.S. railway.

But Credit Suisse's Mr. Yablon said the tough new merger rules proposed by the STB present such big hurdles that it could be two to three years before any railways are willing to attempt another transcontinental merger.

Mr. Yablon said this is good news for investors, since the last round of rail mergers hurt the bottom line of many railways. One notable exception was the 1999 merger of CN with Illinois Central Corp., which is generally seen as successful.