When the economy is doing well, more goods are transported across the country. We’ve seen airlines post record travel numbers in the past year, and by similar logic, it’s not surprising that railway operators have also been doing well. The Canadian economy continues to do well and we’ve seen multiple interest rates hikes as a result, and more could still be on the way.
Two stocks that have benefited from the bullish economic conditions are railroad stocks Canadian Pacific Railway Limited (TSX: CP)(NYSE: CP) and Canadian National Railway (TSX: CNR)(NYSE: CNI). As of the end of last week, CP Rail had soared more than 35% in the past 12 months and is near its 52-week high. CN Rail is also near its high for the year, although its returns during the same time frame are a bit more modest at around 15%.
While both stocks have surpassed the TSX’s returns, the big question is whether or not the shares have peaked and whether there is much upside left for investors who buy today. Let’s take a look at both sides of the argument.
Why the stocks could continue to soar
The economy keeps adding more jobs, and the national unemployment rate is only 5.8%, which is the lowest it has been in four decades. If this trend continues, then it’s hard to imagine things slowing down for either CP or CN Rail, as traffic levels are likely to continue to rise.
Over the past 10 years, the stocks have shown very positive trends, rising 300% during that time. While there may be dips that may occur as a result of economic conditions, these two stocks are proving to be very stable, consistent performers. And given how large this country is, the demand for rail transportation simply isn’t going anywhere anytime soon.
Why the stocks could falter
Although the stocks have done very well over the past 10 years, it was about a decade ago that we saw the last big economic crisis, and since then things have been fairly stable. However, that could change as U.S. politics are presenting lots of uncertainty for Canadian companies.
What happens with NAFTA could have a big impact on the Canadian economy and poses a big risk to many businesses. We’ve already seen one Canadian company make a drastic move after facing the threat of significant tariffs.
Uncertainty is always an investor’s nightmare, and there’s a lot of it involving the U.S. right now. It has the potential to affect many industries and rail stocks could just be a small part of that, but they certainly can’t be ignored either.
Bottom line
In the short term, there’s a fair bit of risk when it comes to the economy and what will happen with U.S. relations. However, if there’s a change in the U.S. leadership, then any changes may be short-lived anyway. The problem at this point is that there are more questions than answers.
Over the long term, however, these stocks look to be good buys that are likely only going to continue to grow as the economy expands and gets stronger.
