The market’s favourite stocks can stay a favourite for much longer than anyone expects. Then expectations catch up.
A disappointing quarter, weaker guidance, or one crowded trade heading for the exit can turn yesterday’s unstoppable winner into tomorrow’s portfolio headache.
That doesn’t mean investors should spend their lives predicting the next rotation. But it might mean owning businesses that don’t need to be fashionable to keep making money. That’s where I’d look when the hottest stocks finally cool.
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Follow the cash, not the crowd
High-growth stocks deserve high valuations when earnings can sustain a rapid pace of expansion. The danger appears when investors start paying for several excellent years before those years arrive.
A less glamorous company can offer a different equation. Revenue grows steadily, while cash flow funds reinvestment, dividends, and share repurchases, allowing the business to survive without attracting a new investment acronym every six months.
Those companies don’t always lead roaring markets. They can become much more interesting when investors remember that profits count too. One of my favourite examples on the TSX is Canadian National Railway (TSX: CNR).
A railway built to last
CN operates roughly 20,000 route miles of rail connecting Canada’s Atlantic, Pacific, and Gulf Coast trade routes. Its trains move grain, chemicals, petroleum products, automobiles, metals, forest products, and intermodal containers.
That physical network gives CN the advantage of a wide economic moat. Rights of way are difficult to replicate, while rail can move large freight volumes more efficiently than trucks across long distances.
Furthermore, CN’s latest results weren’t exactly boring. Second-quarter revenue climbed 11% year over year to $4.8 billion. Revenue ton-miles, a measure combining freight weight and distance travelled, increased by 5% as grain and energy volumes strengthened. Adjusted earnings per share (EPS) rose 11% to $2.08. Management then raised its 2026 outlook. CN now expects low-single-digit revenue ton-mile growth and mid-to-high-single-digit adjusted EPS growth.
Free cash flow reached $1.8 billion during the first half, up 19%. That cash is funding shareholders too. CN repurchased approximately $1.3 billion of stock during the first half and currently pays a $0.92 quarterly dividend. For investors looking for Canadian blue-chip stocks, those numbers make a stronger case than whatever theme happens to be trending this week.
The valuation has caught up
There is one complication as CN isn’t exactly hiding in the bargain bin anymore. Shares recently traded around $168.62, up substantially from the $126.96 52-week low. That puts the stock around 19.7 times forward earnings and gives its $3.66 annualized dividend a yield near 2.2%.
I’d therefore build a position gradually instead of treating “boring” as another word for cheap. What’s more, railways remain tied to the economy. A slowdown in industrial production, weaker consumer imports, tariffs, or falling commodity shipments could reduce freight volumes.
CN’s adjusted operating ratio also worsened to 62.2% last quarter, partly because higher fuel prices increased both revenue and expenses. Investors should watch whether efficiency improves as volumes grow. None of that eliminates the long-term advantage of owning infrastructure competitors can’t easily reproduce. It just means valuation and execution still count when buying stocks in Canada.
Bottom line
I don’t know when the hottest corner of the market will cool, but frankly, I don’t need to. CN has freight to move, customers to serve, an irreplaceable network, and billions of dollars moving through the business whether investors are excited about railways or not.
When crowded trades start losing their shine, that’s exactly the kind of boring I’d want waiting in my portfolio.
