The Major Catalyst to Short Canada’s Railways!

After an incredible run in Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP), investors need to pull back and potentially short shares.

| More on:
railroad

After yet another tweet by U.S. president Donald Trump, Canada has become part of a global trade war that may make it more expensive to purchase goods and much more difficult to export them into foreign countries. The writing may be on the wall for investors to make substantial gains from shorting the country’s railroads.

In spite of being fantastic investments, according to Michael Porter’s five forces, we must remain diligent to the realities of life. At the present time, railroads move a very large part of the goods that go in and out of Canada. Should a trade war ensue, and fewer goods are bought and sold between countries, the repercussions could be severe.

Beginning with shares of Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP), investors who are not obtaining capital appreciation will be left with only the dividend yield, which is no more than 1.1%. After a tremendous run, shares of this behemoth are finally in nosebleed territory and are presenting an opportunity to investors — in the short form, as earnings will have major difficulties in growing from here.

As revenues and earnings have trended upwards for many years, the company has been swimming with the tide as the economy has expanded. To boot, cost containment has never been more present. The problem, however, is that once the expectations of per-share profit increases exceed the capacity of the railroad, the inevitable will occur: shares will decline. No matter how you slice it, expectations will not be met!

For investors who are familiar with the history of the typical economic cycle, one of the leading indicators to a recession is very low unemployment — a reality we now face. As a result of this, the railroad will not be able to increase its capacity, as there are simply not enough workers willing to work the overtime necessary to move the goods. For other companies, production may not be enough to meet demand, which will translate to an earnings miss. We’ve seen this story many times over: companies just don’t have the capacity to meet expectations.

Bigger brother Canadian National Railway (TSX:CNR)(NYSE:CNI) is no different, except that the dividend yield may be enough to keep some investors patient for a longer period of time. At a current price of $106 per share, the yield is no less than 1.7%, which is comparable to the risk-free rate of return. The risk, however, is that shares decline in value, and investors see their capital dwindle. Over the very long term, however, investors will be fine.

As is always the case, investors must consider what they are paying in comparison to what they are receiving. In the case of Canada’s railroads, the current offering may not be attractive enough for many to consider. The next 12-24 months, however, could present incredible opportunities for investors to reap large rewards. This industry will need to be followed closely from here.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ryan Goldsman owns shares of Canadian National Railway. 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.

More on Investing

A worker gives a business presentation.
Dividend Stocks

TSX Communications in April 2024: The Best Stocks to Buy Right Now

Here are two of the best TSX communication stocks you can buy in April 2024 and hold for years to…

Read more »

Man holding magnifying glass over a document
Tech Stocks

Watching This 1 Key Metric Could Help You Beat the Stock Market

One key metric that Buffett looks at is the return on equity. Here's why you should watch it.

Read more »

Man considering whether to sell or buy
Dividend Stocks

Royal Bank of Canada Stock: Buy, Sell, or Hold?

Royal Bank of Canada (TSX:RY) has a high dividend yield. Should you buy it?

Read more »

oil tank at night
Energy Stocks

Is Suncor a Buy, Sell, or Hold?

Suncor Energy stock is off to a strong start in 2024. Is the TSX energy stock a good buy right…

Read more »

Daffodils in bloom
Tech Stocks

2 Best “Magnificent Seven” Stocks to Buy in April

Two surging mega-cap tech stocks are the best buys among the “Magnificent Seven” this April.

Read more »

A golden egg in a nest
Stocks for Beginners

Got $5,000? 5 Stocks to Buy for Lasting Wealth

Got $5,000 to build a long-term compounding stock portfolio? Here are five top Canadian stocks to building lasting lifetime wealth.

Read more »

Businessman looking at a red arrow crashing through the floor
Dividend Stocks

BCE’s Stock Price Has Fallen to its 10-Year Low of $44: How Low Can it Go?

BCE stock price has dipped 39% in two years and shows no signs of growth in the next few months.…

Read more »

Dollar symbol and Canadian flag on keyboard
Dividend Stocks

Invest $10,000 in This Dividend Stock for $3,974.80 in Passive Income

This dividend stock gives you far more passive income than just from dividends alone, so consider it if you want…

Read more »