The TSX industrials sector often gets overshadowed by the more popular energy and financial sectors, which typically offer higher dividend yields. However, overlooking industrials can be a misstep.
In particular, three companies stand out not for their flash but for their solid performance and stable market positions as natural monopolies. These firms might not catch the eye at first glance, but their historical performance speaks volumes about their investment worthiness.
Here are my top three picks from the TSX industrials sector for May 2024, highlighting companies that combine reliability with steady growth potential.
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Two railway stocks
No two companies better exemplify a duopoly within the Canadian market than Canadian National Railway (TSX:CNR) and Canada Pacific Kansas City (TSX:CP).
Over the years, these two giants have solidified their positions as the main players in Canada’s railway sector, creating a natural duopoly.
This dominance is largely due to the substantial infrastructure required to operate a railway, which involves extensive and costly networks of tracks and stations. Such a high barrier to entry makes it unlikely for new competitors to emerge, thus maintaining the status quo.
A few decades ago, both companies also adopted a strategy known as “precision scheduled railroading,” or “PSR,” which significantly enhanced their operational efficiency.
As a result, both CP and CNR now boast impressive double-digit operating and profit margins, showcasing their ability to maximize profitability through stringent management practices.
However, there is currently a cloud of uncertainty hanging over these companies – the prospect of strike action. Labour risk is a common issue in the railroad industry, and while both CNR and CP have weathered similar challenges in the past, it remains a concern for investors.
Nonetheless, any resultant weakness in their stock prices could present a buying opportunity. History suggests that these companies are resilient, and buying during periods of labour unrest could be a strategic move for those looking to invest in these well-established rail giants.
A garbage company
Take a moment and look outside your residence on trash day; chances are, it’s a Waste Connections (TSX:WCN) truck handling your garbage pickup.
This company exemplifies another natural monopoly within the industrials sector, largely due to the complexities and regulatory requirements involved in securing permits for landfills and establishing waste collection routes.
Securing these permits and routes can be so challenging and restrictive that few new competitors can enter the market, allowing established players like Waste Connections to dominate.
Garbage collection might not be the most glamorous industry, but it proves to be immensely profitable, especially for a company like Waste Connections. This firm has leveraged its position effectively to continuously acquire smaller, regional competitors, expanding its reach and efficiency.
Currently, Waste Connections is experiencing impressive year-over-year earnings growth of 16.3% and revenue growth of 9.1%. It’s also one of the less volatile stocks out there, with a beta of 0.67.
