Canadian National R.R. (CNR.TO)

It was a top pick two months ago and she has added more since. They are investing a lot of money into their network, building more passes, etc. They are ready for volumes to pick up and there is room for the Canadian economy to do better. It is attractively valued.

Quietly creeping up from its low of ~$127.50. Looks encouraging so far. 

If North American economy continues to remain robust, that would be hopeful for the rails. He'll get more of a sense of this over the next few weeks. We're heading into earnings season now -- US banks start reporting next week, and the rails start the week after. By month's end, should have results from the big rails on both sides of the border.

Reason rails haven't done better in this bull market, is that it's been a very bifurcated bull market (the real gains have come from technology). The industrial economy is still in a modest recession, and everyone's waiting for the goods economy to come back. Still an attractive Canadian equity.

He'd prefer UNP.

Yes, it's an opportunity to pick it up. Big picture is that the rail businesses are now very consolidated, so they're much better at operations. Better pricing, as they're not constantly competing against each other. Hurt because of tariffs. CP, though, now has a much better footprint than CNR.

Regardless, rail is way better than trucking. Much more environmentally friendly. Once tariff chaos gets resolved, we still need to move things across our country and rail is the best way to do it. People feel that the worst is behind the rails. Commodity prices have moved up, so rails should see better pricing in the next little while. A bargain at these levels.

With the IYT breaking out, he's watching the transportation sector and it's pretty attractive. It's more the logistics companies that have caught a bid. In general, rails have continued to underperform so they need a bit of work. Give it a bit more time before putting $$ to work.

When the price of oil is low, but the price of diesel is lower, trucks can be more competitive. Rails have their big advantage when the price of oil is high, as they tend to win more traffic.

No secret that we're in one of the longest freight recessions in history. Plus, an additional hit from tariffs. Things are as bad as they've ever been, so there might be an opportunity in the rails though recovery might be slow. Rail assets are irreplaceable.

Stock's fallen, but the business itself hasn't changed. Yes, affected by tariffs. Previously, it's been wildfires or labour disputes. Apathy for the space. (He also owns CP, but CNR is slightly cheaper.) Attractive, quality business. Great economic moat. Choppiness from time to time in the short term, but they've been around for 100 years. Irreplaceable assets. 

They'll get through tariffs and back to some level of growth. Trump being in office for the next 3 years is already in the price. You can have good news and a cheap price, but you can't have them at the same time. Here you have bad news (that's not actually that bad in the long term) and a cheap share price. Risk/reward very compelling. Yield is 2.69%.

Trade issues have hurt these stocks. Likes it because they don't have pricing pressure from many different places. They care more about safety. They consolidated to achieve better rates of return. Will do going forward when there is less impact from tariffs.

Embedded networks, hard to replicate. Valuation has dropped quite a bit, probably the lowest in the group now. Last year, reduced guidance (unusual for them) and volumes not as strong, plus labour and port strikes. 

Capex on network to increase capacity is now behind them. Latest earnings report indicated capex now more in line with other rails -- in mid-teens as a percentage of revenue (down from over 20%). Reduced labour costs. Operating ratio (expenses as percentage of revenue) is coming down. 

We now have more clarity on tariffs. Recent federal budget promotes investment in Canada (though we'll have to see about the execution). But success in that should benefit any transportation company. Yield is 2.69%.

Attractive today. Makes sense in the narrow sandbox of Canada. Assets are pretty robust. Prince Rupert expansion should help volumes.

However, take a closer look at UNP.

Tariffs have limited the enthusiasm over the rails, as well as fears of a slowing economy and weaker commodity shipments. However, the PE looks attractive. Out of next year's new trade agreement in North America will benefit the rails. ROE has trended higher than CP's over the years.

At about 17X earnings, CNR is right at the 5 year lows for their valuation with it trading as high as 28X at some times. Zooming out to a 10-year period, the valuation is essentially at the lower bound of the historical valuaiton range as well, with only a few instances of it dipping below this for a short period of time.
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Holds neither. Not overly interested in the space at this time, given the soft environment we're in in Canada. Q2 GDP was -1.6%. Tariffs are also affecting companies, so volume of shipments is lower. Time to own rails is earlier in the economic cycle.

If he had to choose, it would be CP -- it's more diversified in the US and Mexico.

Rails are extremely capital-intensive businesses. Always lots of maintenance capex on the network and its equipment. Over many years, does generate FCF but it's not huge. Recession resistant. Duopoly. Not going away. Not the type of business or valuation (too high) his team goes for. Small dividend.

The transportation sector has been depressed this year and she sold in January. CN is the leading North American freight railroad. It is starting to look better with volatility stabilizing. The big story in on the operating levels and it is starting to look more efficient even without top-line growth, so there is potential upside. Analysts see 20% upside.