Canadian Pacific Rail (CP.TO)

The stock has done very, very well, and thinks there will be a continued economic strength that will surprise people. Probably not a terrible investment going forward.

The rails have probably bottomed here. We are seeing the top line growth falling, starting to come back. The story on this is that they have been cheaper than Canadian National (CNR-T) and probably have more cost cutting tools than their peers. He would buy this on a bit of a pullback.

Canadian National (CNR-T) or Canadian Pacific (CP-T)? When the market started to weaken last spring, one of the things that led the market to the downside was Transports. Over the last few weeks, transports have been picking up relative to the market, which is encouraging for the market. This is an interesting time to take a look at the transports. He has a simple view. CN is North- South; US-Mexico. CP is more about East-West and more about commodities and more about global trade. He prefers to make the trade on the North American block. CN right now is about 15% of forest products, and the housing market in the US has been growing now at about 10%. He would prefer Canadian National at this point.

Grains have been a real pain lately, however a lot of it is in storage and there has been a very large grain crop, so he expects it will pick up later. Autos could be a bit of a risk over the next few years should North American production turn down. Intermodal volumes have fluctuated, depending on the quarter and depending on the rail. The nice thing about rails is that time is on your side. They are the more efficient way to move things. Over time, there is a real growth algorithm. Very good businesses over the long-term.

You are at your limit in terms of price (EBV+6), and his model price of $198. But long term it looks pretty good. By next year EBV+6 will be $256. There is not an American railroad he likes.

Has a cash ROE of about 45%, and this divided by the PE is about 3.5%, which is healthy and above the level of 2 that he likes to see. With consistent ROE generators, you want to hold them. However, at some point we are going to have another recession, and this will be a bit challenged, at which point it would be a good time to add to your holdings.

Hunter Harrison brought in a team, and they have the same DNA that Hunter has, so things are going to be just fine when he retires. If we see any uptick globally, and we start to see freight traffic growth globally, you are going to see this and some of the other rails recover pretty well.

Bill Ackman owns a 6.7% stake in the company, worth about $1.9 billion Canadian, and is selling his shares. No one should react to something like this. If you are in the stock because he is, then it is time to get out. Commodity volumes in Canada are not great. This is a decent company and he would not Sell because one guy is in it. You are going to have to wait for the Canadian economy to fully recover to make any money. But it is a very well-run company.

(Market Call Minute.) Freight rate volumes are down 8% year-over-year, so you want to be careful.

Canadian National (CNR-T) or Canadian Pacific (CP-T)? He owns CNR and prefers it, as it has less commodity exposure and more cross-border north/south from Mexico. The whole transportation division has been weak lately, but likes it as a long-term investment. You don’t have to run out and buy the rails at this time.

Canadian National (CNR-T) or Canadian Pacific (CP-T)? He really likes the rails. He hasn’t followed this one too closely, so Canadian National would be his choice.

North American rails suffered from 2 things. Overall economic activity has been weaker and commodity volumes, specifically this rail, has been a lot lower. Coal has been abysmal and oil and gas has been down as well. Despite all this, it is going to grow earnings 10% this year with no top line growth, a combination of really good operational management and cost cutting and share buybacks. Feels earnings growth rate will be in a double digits next year.

(Market Call Minute.) Likes the rails, but prefers Canadian National (CNR-T). However, this one is fine.

This went through a difficult time in 2014-2015, and technically went into a downward trend. Currently it is forming a bit of a base. Seasonally the stock has a history of moving higher from late January through to the beginning of May of each year. The problem is that this stock has double seasonality. After May the stock tends to go down. We have passed the period of seasonality, so now is the time to take some profits.

Canadian National (CNR-T) or Canadian Pacific (CP-T)? Looking at the consensus projections, this is probably more attractive, but thinks they have more work to do in getting their house in order. (See Top Picks.)