NEW YORK (CNN/Money) - I generally try to avoid recommending a stock right before the company reports earnings. It's just too easy to be embarrassed by some negative surprise.

But I'm making an exception for Union Pacific, scheduled to report fourth-quarter and full-year results on Wednesday. I think the earnings report will be good, drawing attention to an underappreciated stock particularly suitable for conservative investors.

Most investors ignore railroads nowadays. But in the 19th century, they were one of the stock market sectors where fortunes were made and lost.

In addition, they were central to the Dow Theory, the first modern system of stock market analysis. The system is based on the classic business cycles that occurred before the Great Depression.

Here's how it works:

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Business cycles run from recession to recession. A new cycle begins after the economy has been depressed long enough that interest rates fall. Lower interest rates encourage customers to make major purchases and companies to build up their inventories and make capital investments. The result is a revival in economic activity, especially in manufacturing.

If the first phase of the cycle is based on falling interest rates, the second consists of rising industrial production. As consumers buy more, companies order additional inventory in anticipation of even greater sales to come. The final phase occurs because goods that have been sold have to be shipped to customers.

As a result, transportation activity picks up after manufacturing does.

Over five years or so, rising economic activity and corporate expansion cause interest rate to rise, triggering a recession. Once the economy cools down enough for rates to ease back down, a new cycle begins.

Most investors pay attention only to the Dow industrials. But there are actually three Dow averages -- utilities (which respond to interest rates), industrials and transportations.

Since these averages don't rise and fall at the same time, the most effective diversification consists of owning stocks from all three of them.

It's easy to find utilities and other interest-rate sensitive stocks, but finding an attractive transportation stock isn't all that easy. There is one, however, that meets my tests for growth and financial strength.

Union Pacific is the largest railroad in North America. As Dow Theory would predict, Union Pacific lagged the broader market when the recovery began last year.

But the improving economy is already having a positive effect on Union Pacific's business. Bumper crops of grain and strong exports have led to a shortage of transport. To handle the extra business, Union Pacific is adding locomotives and hiring more employees.

Why doesn't Union Pacific (UNP: Research, Estimates) attract more attention as a timely investment?

Partly it's because railroads lack glamour. Partly it's because their stocks lag the market. Partly it's because high fuel costs in 2003 squeezed profit margins. Partly, it's because top executives have been slow to pay back loans from the company that were used to buy stock. Legislation that went into effect in 2002 barred new stock-purchase loans but did not require outstanding loans to be paid back immediately.

None of these factors should be a real damper for the stock. The fact that rail stocks lag simply means that you can buy them at attractive prices.

Fuel costs should ease this year and are being passed through to customers, in any event. And Union Pacific has stated that top execs would finish paying off their stock-purchase loans within a month or so.

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Earnings are projected to rise 22 percent in 2004 and grow at a compound annual rate of more than 12 percent over the next five years. The company recently raised its dividend 30 percent, giving the stock a 1.8 percent yield. That works out to a potential total return averaging about 14 percent a year.

At around $66, the stock trades at less than 14 times its estimated earnings for the coming year. You may want to wait to buy the stock until the earnings have been announced, but Union Pacific is a company to watch.

Michael Sivy is an editor-at-large for Money magazine. Sign up for free e-mail delivery of Sivy on Stocks every Tuesday and Thursday.