Shares of Canadian National Railway (TSX:CNR) have really underperformed the market in the past three years (down around 16%). And while the odds feel high that the next three won’t be nearly as bad, questions linger as to whether the former market darling and dividend growth star can get back to its outperforming ways. To make matters worse, the TSX Index came off one of its best years in a long time, with close to 30% worth of gains. Meanwhile, those ice-cold shares of Canadian National Railway (or CN Rail for short) seem to be stuck on the tracks, down close to 6% in the past year.
If you’re still hanging on despite the dragged-out bearish implosion, you’re probably one of the more patient investors out there. And while that’s typically a good thing, investors must know when it’s time to cut their losses and move on. When it comes to shining performers in the Canadian stock market, there are so many options to pick from.
In fact, your average blue-chip stock atop the TSX Index is probably having a better past five years than CN Rail. While the stock could continue to be a drag on portfolio returns for some time, I think that throwing in the towel may not be the best move at this juncture, especially when you consider the potential for multiple expansion (shares have become way too cheap in recent years).
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CN Rail stock is getting super-cheap
At the time of this writing, shares trade at 16.9 times forward price to earnings (P/E). That’s close to the lowest I’ve seen in some time. And while market valuations across the board have gotten frothy, with some low-growth stocks trading in the 20 times P/E multiples, I see shares of CNR as a glimmer of value that’s still out there.
Of course, whether investors scoop up the stock while it’s close to its multi-year lows remains another question entirely. There are certainly ample headwinds (the tariff situation might worsen from here before it gets much better) and other issues to be concerned about, as well as a seeming lack of catalysts.
In any case, the big question remains for value investors: will CN Rail stock find itself out of the rut? And can the firm make up for lost time under its current management team?
More unknowns ahead, but expectations are low
In three years from now, I see CN Rail stock well higher than current levels, likely back to or even slightly above all-time highs just shy of the $180 per-share mark. But there’s likely going to be continued volatility on the road higher, especially if management can’t drive that operating ratio lower in spite of the external disruptors.
Whether we’re talking about strikes, tariffs, or other macro unknowns, I do think the firm must do what it can to drive operating efficiencies. While the rail scene has been held back in recent years, the chart of CNR has to be one of the nastier ones.
And until the firm can prove it’s worth a relative premium, even in an industry downturn, investors may wish to be cautious incremental buyers, rather than loading up at these depths. Though things have been looking up since the November lows, I’m just not sure if this subtle jump is the start of something bigger. Time will tell, but if you want value and a 2.6% dividend yield, CNR looks like a buy.
