Some of Canada’s top transportation stocks have really pulled the breaks of late, thanks in part to the hazy macro backdrop. Indeed, if a Canadian recession does actually materialize, the cyclical plays, including the transports, may have further to fall. Though the transports may be a tad more sensitive to the state of the economy, I continue to view them as intriguing buys on weakness if you’re committing to invest for the next three to five years.
Indeed, the rough terrain is worth riding out if you’ve got a long enough time horizon and a strong enough stomach!
Without further ado, this piece will have a closer look at two Canadian transportation stocks that I believe look absurdly undervalued, even if a mild recession is just a few months away.
At the end of the day, investors should insist on picking up shares of wonderful firms at reasonable prices. Numerous transport plays sport pretty wide moats. And for that reason, they seldom go on sale unless macro headwinds are present.
As the economy stalls and inflation weighs, 2024 isn’t looking like too upbeat of a year. But I think the meagre outlook is already priced into Canada’s top transport plays. My guess is that they’ll keep pushing higher against year-ahead expectations that I view as pretty modest.
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CN Rail
CN Rail (TSX: CNR) is not an exciting Canadian stock by any means. The $98.4 billion railway was punished with a big downgrade just a few weeks ago, thanks to inflationary pressures (labour and fuel have gotten pricier of late). Despite the downgrade, I’m still confident that CN Rail will be able to find its way as it looks to navigate through what I think could be the last round of macro headwinds.
Indeed, the rails are pretty economically sensitive transports. But their moats will prevail, and CN Rail will probably be back in rally mode. With an extensive network and a somewhat decent management team, I view the 20.5 times trailing price-to-earnings (P/E) as a fair price to pay for one of the moatiest companies in the country! The 2.1% dividend yield is also safe and ready to grow from here.
CP Rail
CP Rail (TSX: CP) is more than just CN Rail’s top rival; it’s one of the most exciting firms in the rail space following its merger with Kansas City Southern. Like CN, CP has been punished by investors of late. Management pointed to macro headwinds for the year ahead, in addition to port strikes.
Indeed, the medium-term trajectory looks very bumpy for CP. However, I do think the big merger will pay off in five years’ time. So, if you’ve got a long enough time horizon, I’d argue that 22.6 times trailing P/E isn’t all too high a price to pay for what could be one of the best growth stories in the entire rail industry!
The 0.75% dividend yield isn’t anything to write home about. But it can grow into something special if you’re looking to hang on for more than a decade.
