Sometimes it’s hard to be a long-term investor, especially when a stock you’re being patient with continues to underperform. Indeed, it’s one thing to settle for a year or two of market-trailing returns. However, it’s another thing for shares of a supposed wide-moat dividend growth hero to drag for more than five years. At what point does an investor throw in the towel and find something that’s just a bit timelier that isn’t getting left behind as the broad stock market marches higher?
That’s the big question for long-term value investors. And it’s one that isn’t all too common among retail investors nowadays, especially since many investors wouldn’t think twice about dumping a laggard for something with a bit more momentum behind it. After all, why stay stuck in a value trap when one could score gains in something that’s working? Also, why settle for market-lagging results when you can just bet on the broad market for such a low fee with a vanilla index exchange-traded fund (ETF)?
Indeed, it’s hard to stick with those names that have fallen below our expectations. But before you pare such laggards from your portfolio (especially your Tax-Free Savings Account or Registered Retirement Savings Plan), investors should ask themselves what’s changed and if any catalysts can finally kick in that allow a lagging firm to make up for lost time en route to becoming a leader again.
Sometimes, the right call is to pare a name from the portfolio or, at the very least, trim if there’s no plan in place or a management team that’s made a habit of failing to deliver.
CN Rail stock has been lagging, but it’s still worth holding
In this piece, we’ll check in on a five-year laggard in CN Rail (TSX:CNR), which is up 0% in the past five years while moving around choppily.
Of course, the 2.61% dividend yield is enticing, but relative to the TSX Index, CN Rail has been a major laggard, and some may wonder if it’s time to move on from the fallen railway while it’s still in a bear market, down 22% from its all-time high hit back in 2024. Shares have been inching higher in recent quarters. And while the February gain is mildly encouraging, I certainly wouldn’t treat the move above $140 per share as an opportunity to lighten up on a position.
Personally, I view CN Rail as a great super-long-term hold, even as it manages through one of the harshest periods in recent memory. Of course, it’s been a tough five years, but my guess is the next five will be far brighter for the rail firm. Easier comparables are on the horizon, and while headwinds have not vanished, I think that freight volumes will rebound in due time, whether that’s in a few quarters or a year or more.
But if you’ve been so patient, why wait longer for an underperforming management team to deliver?
To put it simply, shares are too cheap at 17.4 times forward price to earnings (P/E), especially when you factor in the nearly guaranteed dividend hikes you’ll get along the way for holding. Though capital gains may be harder to come by, I think the worst is already baked in and that investors might have the odds on their side as investors come to expect less from the rail juggernaut.
