Canadian National R.R. (CNR.TO)

Usually rails to well this time of year into mid-April but we saw weakness in rails recently, probably due to Crude by Rail. He is not sure he would step in this late into the transportation trade.

One of the best run and maybe ahead of CP-T. The problem with rails is that they have been doing so well for so long that investors expect they will keep doing this well for a lot longer. They have gotten very expensive historically. The US rails have done well also. There is additional risk if there were an economic slowdown. Thumbs up short term, but long term they are expensive and destroying value.

One of his favourite North American rail companies.

Still trading at about 17X forward earnings, so it is above its historical norm. Institutional investors trade this on a forward PE, and it is at the top end of that, so this is not a great entry point. However, as a long-term investment, it is a great proxy for the Canadian economy. Also, relatively modest in terms of it’s debt load. He just would not invest in it currently.

This is still his preferred rail name. If you pay too much attention to the research, it will tell you it is overvalued and you get nervous. He has just kind of put this thing away, and his Stop will tell him when he is getting into the Yellow zone.

(A Top Pick Jan 23/14. Up 45.16%.) Rails have been a wonderful investment over the last few years. The risk to the story right now is the slowdown in the oil patch. This one, of any of the rails, has more north/south traffic all the way to Mexico. Lumber was 20% of their freight revenue in 2001-2002, so there is some opportunity here, but possibly some risk from energy.

Rail. Seasonality tends to be from October to November and February until May of each year. You aren’t going to do that well until the end of February.

One of the drivers in Canada on the rails has been the shipping of oil. To see this continue, there will have to be some stalling on the new pipeline builds. Also, the pricing of services where they have the 2%-4% increase every year, which would have to continue.

This initially got hit a little bit on oil, because people were worried about crude by rail volumes going down. However, fuel is an input, so they are saving some money. Also, the economy should pick up. If the economy picks up more and you are expecting accelerating growth in the US, this is one of the only North American railroads, and could stand to benefit in this type of environment.

A core holding for him. The company will continue to do well with the increase in housing in the US with the transport of lumber. You have a little bit of an uptrend going on here. You could wait until the stock gets down to the 200 day for safety. Great company, but you have to hold for the long term.

Looking out 3-4 years, this is consistent with a recovery in the US, so he would continue to own this.

The most efficient railroad in North America. Its operating margins are terrific. Balance sheet is pretty good. Funds from operations are pretty good. There is lots of room to increase the dividend. Although they have weather exposure in Canada and some exposure to the oil industry, they have a well diversified load in excess of 30,000 km of track. The company is fabulous; however, the stock is really expensive. If you could buy this at $60, it would be a terrific buy. He is not sure if it is ever going to go back to $60. He prefers CSX (CSX-N), a high-quality US carrier and trading at a much lower price earnings multiple, and with a higher dividend it is a better buy.

Less exposure to oil than CP-T. It never quite gets cheap enough for his metrics. There will be some volatility now. Buy about $70.

This is trading off in sympathy with what is happening in oil. This is a great derivative play. What he finds interesting is that crude by rail and fracing sand shipments are about 9% of their business. They do a lot of merchandise, a lot of international intermodal with the best operating margins at about 37%. Yield of 1.31%.

58% operating ratio. Probably getting hurt somewhat in crude by rail, but saving a ton in fuel. You need this in your portfolio.