The great Canadian railway stocks have been down and out for yet another year, but things could change in 2026, especially as the economy looks to make up for lost time while negotiations for a potential deal look to continue. Undoubtedly, with higher hopes for a deal between China and the U.S., I’d be inclined to think that a Canada-U.S. deal won’t be all too far behind, especially as tensions settle after an ad that made President Trump threaten to tack on additional tariffs.
With PM Mark Carney reportedly apologizing for the ad, there are a lot of things to look forward to as the odds of a new deal and a recovering Canadian economy look to increase.
The rail stocks are off the rails. Only one looks like a buy, though
Of course, tariffs have been one of the bigger thorns in the sides of the likes of CN Rail (TSX:CNR) or CP Rail (TSX:CP). And though there are no signs of a clearing coast, I think that CN Rail’s lower capital expenditures and greater efficiency for the new year might just offset the industry headwinds. Undoubtedly, the rail companies can’t control tariffs or the economic environment, but they can make things run more smoothly and cheaply.
While CN, CP, and just about every rail stock could be a tough hold through the next two years, I still view the valuations as difficult to pass up. In a pricey market, perhaps picking up a few shares of the unloved rails could be enough to help you stay ahead of inflation without having to put yourself in the blast zone come the next inevitable market correction, which is probably going to see tech take on the brunt of the damage.
With strong dividend-growth profiles and strategic efforts to shore up more cash for share buybacks and other strategic investments (and maybe even an acquisition), the rails look like stellar bargains as they aim to get their share prices back on the right track.
CN Rail
Undoubtedly, the bad days continue for the fallen rail juggernaut CN Rail, which has lost its lead in the Canadian rail scene, with a market cap that has shrunk to a mere $84 billion. Despite the compression on the valuation (less than 19 times trailing price to earnings) and the swollen dividend yield, which is just a few bad days away from flirting with 3%, I’m staying on the downward-rolling train. I think most of the damage has already been done, and shares are becoming so cheap that it might not take anything more than a mediocre quarter to power an upside move.
With CNR shares rising around 3% following a pretty good quarterly earnings result, I’m inclined to think it’s time to get back in. The company is becoming leaner, having recently announced a layoff of around 400 managers amid tariff-induced headwinds. Even with tariffs and all the sort, I think CN Rail might be able to climb back, even before a trade deal is in the books.
CP Rail
Similarly, CP Rail has been under pressure, with a market cap that’s now fallen to around $91 billion. That’s still higher than top rail peer CN, but the stock is on the downtrend again despite recently clocking in some solid productivity numbers.
At the end of the day, tariffs are weighing, and with higher labour costs and tariff-induced disruption continuing to weigh, and while the rail network is undoubtedly impressive, I’d have to say shares are too expensive at nearly 22 times trailing P/E, with a 0.9% yield that’s not enough to justify hanging on amid industry headwinds. In any case, I’m taking on more of a wait-and-see approach with a headwind-hit name that still goes for an industry premium.
With a timelier cost-cutting plan, I think CNR stock is a far better name to own here.
