Canadian Pacific Railway, Toronto Symbol CP, is one of our long-time favourites. However, we also have a very high opinion of its larger rival, Canadian National Railway—one of North America’s most efficient railways, Toronto symbol CNR.
Canadian Pacific Railway (CP)transports freight over a rail network between Montreal and Vancouver. In the U.S., subsidiaries connect CP’s Canadian lines to major hubs in the Midwest and Northeast. Alliances with other railways extend its reach to Mexico.
Not only was CP our #1 stock pick for 2012, but we recommended CP in our very first issue of The Successful Investor in January 1995. At that time, CP held a variety of businesses beyond railways, such as hotels, coal, and oil and gas. We saw these as undervalued assets. In 2001, CP unlocked some of this hidden value by spinning off these businesses as separate firms.
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As a stand-alone Canadian railway stock, we still felt CP had plenty of room to improve. A prominent American hedge firm shared our opinion, and in 2012, it installed former Canadian National Railway chief executive Hunter Harrison as CP’s new CEO. Thanks to a major cost cutting plan, CP hit a record high of $248 in October 2014.
Canadian Pacific Railway continues to benefit from its efficiency improvements, which include speeding up trains and reducing the amount of time they spend at terminals.
Canadian National Railway (CNR), operates a freight rail network across Canada, and in parts of the United States.
CNR has thrived since it became a public company in 1995, thanks to a series of acquisitions that greatly expanded its U.S. operations. That has helped them profit from the North American Free Trade Agreement (NAFTA), which spurred a rapid rise in trade volumes between Canada, the U.S. and Mexico.
CNR is the originating carrier for 85% of the goods it ships. This helps the company improve its efficiency and speed up its delivery times, because it has more control over when cargo is transferred from ships and trucks to its trains.
CNR has several competitive advantages against CP, such as a larger rail network, better railway efficiency and exclusive access to the port in Prince Rupert, B.C., which is the closest North American port to Asia. Moreover, CNR has a lower price-to-earnings ratio and higher dividend yield than CP.
CNR continues to invest in better trains and tracks by buying new locomotives with distributed power capability. This unique technology lets them run longer trains, particularly in cold weather.
The company’s ongoing focus on improving its efficiency should keep fueling its earnings growth and give it more cash for dividends.
Both of these top two Canadian railways (CP and CNR) continue to focus on cutting costs and streamlining their operations. That’s putting them in a great position to handle changing demand for the cyclical products they transport, such as coal, grain and oil by rail.
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Investing tip: Use our three-part strategy
No matter what kind of stocks you invest in, you should take care to spread your money out across the five main economic sectors: Finance, Utilities, Consumer, Resources & Commodities, and Manufacturing & Industry.
By diversifying across most if not all of the five sectors, you avoid overloading yourself with stocks that are about to slump simply because of industry conditions or investor fashion.
You also increase your chances of stumbling upon a market superstar—a stock that does two to three or more times better than the market average.
Our three-part Successful Investor strategy:
Invest mainly in well-established companies;
Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
Downplay or avoid stocks in the broker/media limelight.
Have you invested in either of these Canadian railway stocks? Share your experience with us in the comments.
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