Wednesday, April 15, 2009

bullish on canadian pacific

Every once in a while on the moneygardener, I get the urge to explain why I like a certain company as an investment. The reasons why I own the stocks that I own for the long term are not as simple as past dividend growth or current low price to earnings ratios. I have specific qualitative, forward looking reasons for owning each and every stock that I own.

Right now, one stock that I am watching intently because I want to add to my position is Canadian Pacific (CP). I was not as interested in CP when it was trading at $86.00 back in July of 2007, but now that the stock is trading below $40.00 I believe CP is ripe for an attractive long term investment. So other than the reasonable valuation, why am I so bullish on Canadian Pacific?

Well, it is a fairly simple thesis; Asian economic growth should be the story of the next 50 years, Canada is flush with resources, and railroads are a boring monopolistic way to play this growth.

Consider this, CP holds a significant market position in the transportation of bulk commodities, which account for a large portion of the company's revenues. Grain, coal, and fertilizers accounted for about 43% of CP's freight revenue in 2007. As a comparison, automotive related products only accounted for 7% of CP's freight revenue.

Over the next 50 years Asia will require a whole whack of coal for steel production and loads of fertilizer and grain for food production. Canada happens to be a prime source for these materials. I see this trend of growing Canadian exports of these materials to Asia as a given and CP will inevitably be a large beneficiary of this growth as they transport from West to Far East.

I own CP shares and I will be looking to add to my position on any weakness in share price in the upcoming weeks, months, and years.



why not ditch all the varied holdings and just invest directly in the institutions responsible for providing the money to industry that keeps the entire economy (asian and western) working and growing? Canadian bank stocks are still paying a 6% dividend if you act now.

MG (moneygardener) said...

You think it would be wise to go 100% weight into canadian banks?

Sampson said...

Hey MG,

I personally have been keeping my eyes on CNR for quite sometime. I feel they've got better prospects in the US with their key lines through Chicago and down to the gulf - plus I think their management is better - but CP IS cheaper for sure.

One question - do you have target weightings for these traditionally conservative equities (utilities, low-growth industrials etc)?

MG (moneygardener) said...

Sampson, that is the popular view for sure. To answer your question, I do not. I try to keep all of my individual positions under 9% or so but some might creep over this for a limited time.


after this market meltdown, the only sure thing is that the banking system is the life-blood of all western economies. governments would rather risk the possibility of going bankrupt themselves than allow their commercial and investment banking system to go bust, even in the most dire of times. i don't typically believe in large personal investments in common shares(primarily, i view the typical common equity diversification strategy as a tax-incentivized form of gambling on businesses i am totally unqualified to run). That being said, if the return on the 5 most stable of canadian investments is yielding roughly 6.5% (when i bought BMO, TD, et al earlier this week), there is little danger in being over-invested.
consider that most bank employees earn most of their pension in common shares and the majority of dividend distributions are reinvested and therefore the cash never leaves the bank's hands. Would the bank really ever have to ask them to take a pay cut just to satisfy investors who need to see payout ratios at standard levels? It hasn't happened so far and ask anyone who knows, this is a once in a lifetime chance (the window is currently closing day by day) to load up on Canadian bank shares if you haven't already.

Elia Mazzawi said...

hey MG,

what is your opinion on covered calls.

I've been building an income portfolio with 1/2 dividend
stocks and 1/2 reits. and i write covered calls on pretty much all my dividend stocks.

I think its an important part of an income generating portfolio.

MG (moneygardener) said...

Hi Elia,

I don't use them as I have never been interested in any option strategies. I like the concept of buy and hold; it fits my personality and keeps me grounded.


you didn't address my points. however i'm trying to help you and other investors. As i educate myself, i'm happy to share knowledge for free. That's my view, knowledge is something we should share and blogs are a perfect forum. I feel most people in canada are uneducated in the fixed-income market. Brainwashed to believe that the only place for attractive yield was in equities. I believe in more than just what a dominant culture espouses. best of luck, solitary investors.

Sampson said...

What sort of address are you looking for?

Your last message suggests that you favor fixed-income investments, however, in all your other messages - you say we should put all our money into CAD bank stocks.

Something is not jiving here.

Re: CAD bank stocks - wasn't Lehman Bros. too big to fail? - What has the CAD government done to make you think they wouldn't let businesses fail. CAD banks are hardly as large as Citibank, JPMorgan, AIG - so if they fail, the reprocussions would not be as significant.

Re: bonds or other fixed-income investments - The US Treasury is printing money and giving it to the banks - this is a sure-fire recipe for inflation - how would locking into fixed yields of bonds help a portfolio if inflation were to outpace your return?


all good points sampson.
1)capital preservation has taken a secondary role to income generation in all people who have suffered tremendous losses.

2) I don't believe in putting a lot of your money in stocks if you don't have a lot of money to begin with. if you have more than $3 million dollars, logic dictates you want to spread some of that money safely in the stock market.

3) For the reasons you cited, it's advisable to not invest in the US, with the treasury and fed printing money the value of the US dollar will likely fall dramatically once the economy recovers.
4) Insiders, if you pay close attention, believe inflation fears are largely, well, over-inflated. meaning expecting beyond 5% annual inflation is highly unlikely. The biggest factor will be a devaluation of the US dollar, from the mouths of people on the inside of the industry.
5) The Canadian government did in fact offer the big banks emergency funds if they needed, for whatever purpose they deemed fit, during a time of global economic crisis... they refused the money and paid their dividend. that's a fact.
6) 6-figure investors are best served by sticking primarily with the fixed income market (as you never suffer significant capital losses) and your education allows you to take advantage of attractive offers. then, to offset the taxation issues, take 10-15% of the taxable portfolio and put it into common shares (the banks as i mentioned, some reits, and some commodity/utility companies). It's a small country, those are almost all the good industries in canada. don't be greedy.
a properly laddered, ten year mixed corporate-provincial bond portfolio will protect from inflation and market volatility.
You don't need 30 different stock to offset the extra tax. Just a few stable, well paying ones.
hope i seem less insane now.


and just to reemphasize, a properly laddered corporate/provincial bond portfolio will consistently yield approx. 5% above inflation.
that might not be enough for you when you consider interest tax. but consider also your principal is effectively guaranteed to be repaid.

Elia Mazzawi said...

this one might interest you, it goes well with buy and hold, I buy and hold as well.

you roll the covered calls on the day if It going to get assigned, ie:

for example using today's price you buy

PC @ 42
sell may 42 calls for $2.10

if you don't get called write another one for next month.

if you are going to get called you buy back
that may 42 call and sell the next month june 42, or the july 44 call. (these will also generate income).

if the stock keeps going up fast, eventually you will have to give them up, but dividends stocks don't skyrocket, and even when the do, you should sell them anyway cause the yield gets lower and the P/E ratio worse.

you keep making money of the time decay.
it significantly increases your yield. and at the same time makes a portfolio more conservative since your cost to buy the stock gets reduced from the first premium your receive.

Anonymous said...

I think if you want to get exposure to Asia, CN is a far better bet - they have exclusive access to Prince Rupert and the only interchange with the Hudson Bay Railway (which links to Churchill). It might be more expensive, but these seem to be permanent advantages over CP