With the announcement of interest rate hikes ending and rate cuts on the horizon, the Canadian stock equity markets are going through an uptick. As of this writing, the S&P/TSX Composite Index is up by 11.92% from its October 2023 low.
The rise in the Canadian benchmark index indicates improving performances by equity securities from various industries. As the situation continues to improve, it can mean good news for several sectors of the economy, including the railway industry.
Cooling inflation will likely mark an improvement in economic activities. In turn, it can lead to a greater demand for transporting various goods. The development can mean excellent news for railway stocks like Canadian National Railway (TSX:CNR).
As of this writing, CNR stock is up by 15.77% from its 52-week low. Let’s look at whether it is a good time to buy the stock or remain cautious about allocating money to the railway sector giant.
Canadian National Railway
CNR stock has been around for a long time, delivering substantial growth since it began trading on the stock market. A lot of its growth over the past decade and a half came through the company’s focus on becoming the best in the country when it comes to precision-scheduled railroad commitments. However, the pandemic saw too much of CNR’s focus go toward growth.
The commitment created issues as CNR tried to acquire Kansas City Southern Railway. Unfortunately, CNR stock lost the chance to acquire it, and its biggest competitor in the Canadian railway sector leveraged the opportunity to expand by acquiring the company. As of now, CNR has repositioned itself to being a precision railroad company.
The company’s management aims to generate solid cash flows, eliminate the need for strikes, and manage unpredictable factors like bad weather better. A solid approach to these initiatives can lead to fewer problems. As it serves various industries through its transportation services, an improvement in the economy can combine with its shift in focus to drive growth for the stock and its investors.
Despite losing the chance to expand its railroad network, CNR stock still enjoys the competitive edge of being the only railroad network connecting three coasts in North America.
Foolish takeaway
For all the good news it has, CNR might still face issues in the near term. The railroad company was historically a major contributor to colonization and was involved with residential schools. When it became apparent that CNR would not do much to repair its relations with indigenous people, the council of 12 indigenous advisors in the company resigned.
With no public apology for its involvement in a dark part of Canadian history that had it dubbed “the train of tears,” the company might be looking at a situation where it falls out of favour with investors.
While it has enjoyed some momentum in share price appreciation over the last few weeks of trading on the TSX, CNR stock is in second place in the Canadian railway industry. The company is behind in growth and volume, which might change as the year progresses. However, it will need a strong demand for its services to make a meaningful recovery to better valuations.
It can be considered a risky holding to consider for your self-directed portfolio in the long run.
