Here’s Why I Changed My Mind About CP Stock

CP Rail (TSX:CP) stands out as a great bargain for long-term upside seekers, even with the rich multiple.

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With the broader markets riding high into mid-May, questions linger as to just how hot stocks can get as the summer season finally approaches. Undoubtedly, with the meme stock euphoria picking up traction south of the border, it certainly seems like there’s a lot of hype out there.

And though the meme stock surge is going to end in tears once again (there’s really no way around it), I do think investors should pursue the long-term plays that can build wealth rather than the ones that can skyrocket tomorrow.

Indeed, insane stock rallies like the ones enjoyed by meme stocks will eventually reverse course. And when they do, some late chasers will be left holding the bag. Many bag-holders will probably be scared out of stock markets for some time. They’ll view it as some sort of speculative casino, and one that’s tilted out of their favour.

Sure, it’s always nice as a small retail investor to “stick it to the man” by helping cause mounting losses in short-seller’s books. But at the end of the day, you should only be seeking to build wealth for yourself. Everything else, I believe, is just a distraction. So, with that out of the way, let’s narrow our focus to one intriguing stock that’s been pulling the brakes a bit in recent months.

Forget meme stocks: Think long-term with wonderful firms

Enter shares of CP Rail (TSX:CP) or CPKC (Canadian Pacific Kansas City), one of the most impressive railway growth plays since CP merged with Kansas City Southern. Undoubtedly, I’ve been quite critical of the railway in the past, primarily for its extended valuation.

Even after the stock slid 11% from its all-time high close to $124 per share, CP stock is still on the pricey end compared to its North American rail peers.

Given the long-term potential and unique tailwinds (like near-shoring, which should benefit freight volumes moving from Mexico to the U.S.) of its extensive rail network, there is better growth to be had. But it’s important to note that the premium multiple had already baked in such superior growth prospects.

I’ll admit that I was put off by CP stock’s stretched multiple in the past. But I’m ready to change my tune after the stock’s latest fall into a correction.

CP stock: What about valuation?

At 26.3 times trailing price to earnings (P/E), CP may still have its premium, but it’s less of a premium for a solid growth profile and a management team that knows how to drive efficiencies at full speed. With the recent news about rail workers voting to strike next month should a labour agreement not be met, there may be a rough quarter ahead.

In any case, I wouldn’t make too much of the matter. The rails have moved through strikes before. And though they’re weighed a bit on various quarters, they seem more like a temporary headwind than anything to sell the stock over.

All considered, CP stock looks like a wonderful buy on the dip right here while it’s going for a premium, but not all too rich multiple.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned. The Motley Fool recommends Canadian Pacific Kansas City. The Motley Fool has a disclosure policy.

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