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The Russell 2000 (NYSE:IWM) is maintaining strong gains on news of lower-than-expected March inflation earnings from major banks. At 2:19 p.m. ET, the small-cap index had added 14.99 points, or 2.17%, to 707.05. The Dow Jones Industrial Average was up 163.74 points, or 1.32%, to 12,526.21.

Stocks small and large are rallying on news before the opening that consumer prices rose 0.3% in March, below the projected 0.4%. The same report by the U.S. Labor Department also showed that core prices, which exclude the costs of food and energy, added 0.2%, as expected.

“Typically, when the economy goes into recession we see inflationary pressures ease, but there is a significant lag,” said Arun Raha, vice president of economic research and consulting for the North American operations of reinsurance company Swiss Re, in an email. “Today’s CPI numbers reinforce that trend. Inflationary pressures . . .

Given the smart money that has been piling into shares of North American railroad operators in recent months, now might not be a bad time to look at a little-known micro-cap play in the sector.

Back in May, billionaire investor Warren Buffett caused quite a market stir after it was disclosed that he had taken several large positions in U.S. railroad stocks. While more recently he has moderately reduced his sector bet, he still retains an outsized position in Burlington Northern Santa Fe Corporation (NYSE: BNI). Other well-regarded investors that have amassed stakes in rail stocks include Carl Icahn, Jana Partners, Atticus Capital and The Children’s Investment Fund.   

While one way to “shadow” the smart money is to simply purchase shares in big-cap rail names like Burlington Northern, CSX Corporation (NYSE: CSX), Norfolk Southern Corp. (NYSE: NSC) and Union Pacific Corporation (NYSE: UNP), another strategy is to look for small or microcap plays in this sector.

One name that has recently caught our eye is $98 million market capitalization Portec Rail Products, Inc. (Nasdaq: PRPX). Pittsburgh, Pa.-based Portec is a provider of a broad range of railroad products, including rail joints, rail anchors and spikes, railway friction management products, railway data collection and management systems, and load procurement systems.

Portec certainly isn’t glamorous, but the rail infrastructure company has posted solid growth in recent years on a combination of organic and acquisition-driven growth. The company believes it has the “dominant market share” in most of its lines of business. The users of Portec’s rail products include Class I railroads, short-line and regional railroads and transit systems. For calendar year 2006, Portec’s two largest customers were Canadian Pacific Railway Limited (NYSE: CP) and Canadian National Railway Company (NYSE: CNI), which collectively accounted for 19% of total sales for the year. In addition to its Pittsburgh headquarters, Portec maintains operations in Ohio, West Virginia, Illinois, Canada and the United Kingdom.