The broad market might be underestimating the railway and telecom sectors after they’ve underperformed in recent years. Undoubtedly, it’s not easy to stay patient with the names and continue adding to weakness (doubling down as it’s often referred to), only to be met with more of the same and dividends, though swollen, that don’t quite make up for the capital losses.
Either way, it’s tempting to throw in the towel at this point, especially as the TSX Index looks to keep making new highs. With the broad market running hot and valuations starting to swell again, perhaps it might make more sense to look at the forgotten names while they’re still under pressure and most other investors are less willing to give them the benefit of the doubt, even as their multiples compress and yields swell.
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Buying the dip isn’t so easy when it comes to rails and telecoms
Now, it’s not easy to be a dip-buyer, especially if you have any sort of lingering doubt about a management team’s ability to pull off a recovery.
Often, recoveries and turnarounds sound pretty easy on paper, but, in reality, they take time to pull off, and that’s provided that the stewards running the show have the ability to execute. Indeed, new managers and all the sort may act as a catalyst for positive change, but there really is no guarantee that a firm can get back on the bullish track, especially if most other players in the industry are in a similar spot.
When it comes to the railroads and the telecoms, it’s tough out there. And while recent negative momentum has heightened risk, I’d argue that after further selling, the risks are actually lower than before. But just because a stock is getting cheaper by the day doesn’t mean it’s time to try to catch a falling knife for a shot at a locked-in high yield and swift recovery gains. If it’s hard to chase hot stocks, I’d argue it’s also difficult to bottom fish in a name that’s fallen so heavily out of favour.
While the rails and telecoms have moved through a rather volatile transition period, I do think it still makes sense to own the names, provided you’re in it for the next five years or more and you’re not easily rattled by increased bouts of volatility.
While a lower expectations bar doesn’t necessarily mean a name is closing in on a bottom, I do think that those who believe in a firm’s comeback chances might be able to get a solid value for their dollar and a shot at locking in a payout that’s becoming tougher to come by in a rising market.
The rails and telecoms could be rich with value
Whether we’re talking about CP Rail (TSX: CP) or BCE (TSX: BCE), which are down 6% and 28%, respectively, in the past two years, I do think the following blue chips have what it takes to become market darlings again. For CP Rail, the rail industry has been filled with headwinds.
And while the 24.7 times trailing price-to-earnings (P/E) multiple might still be a bit rich compared to its rivals, I still think the dividend growth trajectory is worth getting behind. The rail is breaking grain shipping records, and sooner or later, I do think a stronger economy will power the rails back to new highs.
The telecoms, like BCE, which unfortunately slashed its payout before, are in a tougher spot. That said, with a still-decent 5.3% yield and the ability to compete in a fiercely competitive telecom scene, thanks to cost-cutting moves, I wouldn’t count the name out quite yet. There is room to win if the efficiencies go right, and that makes the name worth consideration as shares look to fluctuate wildly after bottoming out last year.
