It’s never a good idea to bet against Canada’s top railway stocks. They’ve been through hard times before and have risen out of the depths of economic downturns, rewarding contrarian investors who stood by them, even when it seemed like the financial world was going to fall apart.
Though Canada is projected to have a recession at some point over the medium term (depending on who you ask!), I think it’s safe to say that the downturn won’t be nearly as painful as the 2008 Great Financial Crisis. Of course, it’s always a good idea to consider the risks we don’t see.
After all, those are the ones that tend to get most investors into a bit of trouble! Who would have seen the pandemic and ensuing 2020 stock market crash?
Very few. But for those who did not panic, the market plunge was one of the best buying opportunities in recent memory. Not all market crashes or bear market moments will result in a quick gain, though. Ultimately, investors should research individual companies and ask themselves one simple question: is a stock’s current market price lower than its underlying value?
It’s all about the risk/reward
If it is, you may have an undervalued stock with a generous risk/reward. And if you can find a stock with a wider margin of safety, you may be able to get more reward per unit of risk you look to bear! Indeed, it’s not easy to value stocks as beginner investors, especially in industries and sectors you’re not too familiar with. Fortunately, you don’t have to place a bet where you don’t feel comfortable.
As for the rails, there’s a business model that’s absurdly easy to understand. They’ve been around for decades, and not a whole lot has changed regarding technologies and how operations are run. Though, precision railroading is a remarkable efficiency driver.
Moving ahead, I believe Internet of Things and artificial intelligence technologies may actually help railways take efficiencies to the next level by reducing the occurrence of derailments and getting goods from A to B in the quickest (and most inexpensive) way possible.
In this piece, we’ll look at CN Rail (TSX:CNR) and CP Rail (TSX:CP).
CN Rail
CN Rail is my preferred railway stock to buy on any dips. It has an impressive network across North America and tends to trade at a discount to its top peer in CP. Of course, CN Rail stock may be a better relative value, but there’s a bit more uncertainty when it comes to the name. Specifically, recent changes in the chief executive officer (CEO) suite, with Tracy Robinson taking the helm after ex-CEO J.J Ruest retired from the firm after mixed results under his reign.
Even if Robinson isn’t the top boss to help CN Rail score industry-leading gains, I think CN Rail is one of those businesses that investors can feel comfortable owning, regardless of who’s in charge. Only time will tell if Robinson can deliver for CN shareholders. In any case, expectations seem modest, with the stock going for just 19.69 times trailing price to earnings at writing. And finally, CN has the edge over CP in the dividend category with a yield of around 2%.
CP Rail
CP Rail (or CPKC following its merger with Kansas City Southern) is a “spicier” railway stock for young Canadian investors. Following its recent merger with Kansas City Southern, there’s track laid down that could take the firm to greater growth. Indeed, CP’s proven top boss, CEO Keith Creel, is also a reason to pay a higher multiple for the stock.
At 25.6 times trailing price to earnings, I view CPKC as neither expensive nor undervalued. Though the merger could unlock value for years to come, I think a lot of the hype has already been baked in.
CN Rail stock looks like a better buy
Personally, I think CN Rail stock has more upside from these levels. CN Rail’s valuation is easier to get behind, even if the growth and management aren’t as impressive as the likes of its long-time rival in Canada.
