In a perfectly efficient market, it’s hard to take advantage of any news, since, in theory, it is immediately reflected in a stock’s price, and the opportunity to gain from it quickly disappears. However, this is just theory. Oftentimes, when we see a company produce a strong quarter, there is a big jump in the share price. The market has a way of overreacting on both good news and bad.
That’s why, when there are signs a company is going to have a good quarter, it might not be a bad idea to buy the stock. It’s difficult to predict if a stock price will go up or down on earnings day, but if the company has a stronger quarter than expected or raises its guidance, then it’s likely the share price will rise. It’s never a guarantee, but it can be a calculated risk.
Canadian National Railway Company (TSX:CNR)(NYSE:CNI) is a stock that could be poised for a big quarter in January when it releases its fourth-quarter results. The company recently recorded a strong Q3, which saw strong sales growth, and with the economy continuing to grow, we could see more of that to come.
However, that’s not the reason why investors should expect a big Q4. CN Rail announced that it was going to add even more workers during its “hiring spree,” which is the largest the company has seen in three years. In total, 3,500 workers will be added this year and another 2,000 will be added in the next. This is a significant addition and makes up almost one-quarter of the company’s workers.
The company is adding workers to meet rising demand, as shipments continue to rise with the railway operator seeing more activity on its trains.
What impact this will likely have on the company’s financials
An increase in demand will definitely see the company’s top line continue to grow, and the share price rising on earnings day will depend on whether or not the increase in sales is more than what is expected by analysts. On the flip side, hiring more workers will add operational expenses, and if the company has budgeted for too many workers, then margins could suffer.
Is the stock a buy?
CN Rail has consistently outperformed the TSX, but in the past three months, returns have been flat. The share price trades at a bit of a premium at ~20 times its earnings and five times its book value. By comparison, Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) trades at ~17 times its earnings and 5.6 times its book value.
However, CN Rail is a much bigger rail operator, and as the economy continues to grow, it will see more of a benefit, as more shipments will be transported on its trains.
CN Rail’s stock offers a dividend of 1.6%, and although that’s likely not going to attract dividend investors, it gives some incentive to hold the stock for the long term.
Given the strong performance the company has had so far this year, it’s due for a rise in share price, and another strong quarter could be what puts it over the top.
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Fool contributor David Jagielski has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.