Canadian investors are searching for undervalued TSX stocks to add to a self-directed Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) portfolio focused on dividends and long-term total returns.
Deals are harder to find after the big rally in the TSX last year, but some top Canadian companies missed the party and could be poised to catch up in the near term.
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Canadian National Railway
Canadian National Railway (TSX: CNR) trades near $137 per share at the time of writing, compared to $179 in early 2024.
A number of factors contributed to the pullback that saw the shares slide as low as $126 last year.
In 2024, CN faced service disruptions due to labour strikes at both the company and the Canadian ports it serves. These incidents forced customers to find alternatives to move their cargo, including through American ports. Wildfires in Alberta in the summer of 2024 added to the pain, delaying shipments and driving up costs. In the end, CN’s 2024 earnings slipped from the previous year.
Management initially had a rosy outlook for 2025. That eventually changed, however, as it became evident that the tariffs imposed by the United States would disrupt shipments from key Canadian sectors, including steel, aluminum, and lumber. This forced CN to reduce its 2025 guidance.
Uncertainty around the timing of a new trade agreement between Canada and the United States will likely cause more volatility for CN in the coming months. The two countries, along with Mexico, need to review the existing Canada-U.S.-Mexico-Agreement (CUSMA) before July 1 to decide if it will be extended or dismantled.
Opportunity
At some point the three countries will get the trade agreements finalized. When that happens, businesses will have clarity on tariffs and will be more comfortable making investments and placing orders for raw materials and finished goods as they plan for growth. That could put a new tailwind behind CN’s stock.
CN operates roughly 20,000 route miles of tracks connecting ports on the Pacific and Atlantic Coasts of Canada with the Gulf Coast in the United States. The networks are key to the efficient operation of the economies in the two countries.
CN remains a very profitable business. The board has increased the dividend annually for 25 years, and CN is using excess cash to buy back stock while the shares are out of favour.
Risk
The U.S. could decide to dismantle CUSMA and negotiate separate deals with each of its neighbours. The resulting agreements, if significantly different from the current trade deal, would potentially impact the flow of goods to and from the United States along CN’s routes.
Another concern is the potential impact of the proposed merger of two American railways. The combination of Union Pacific and Norfolk Southern would create the first seamless east-west railway in the United States. CN’s routes run north-south in the American market, but analysts say there would be competitive disruption and CN could potentially see some clients jump to the newly combined railway.
The bottom line
CN is arguably a contrarian pick right now, given the uncertain outlook on the trade front. That being said, most of the risk is likely already priced into the stock. Near-term volatility is expected, but investors with a buy-and-hold investing strategy might want to start nibbling on weakness.
