CN Rail or CP Rail – A look at the Railways

People trying to get on board the Warren Buffett bandwagon and are too cheap to purchase a Class A share of Berkshire Hathaway (currently $129,538/share) to participating in Burlington Northern are looking at other publicly traded rail options.

These include the following American names:
CSX (NYSE: CSX) – Eastern USA, competes with NSC
Kansas City Southern (NYSE: KSU) – Mid-Southern USA and both sides of Mexico
Norfolk Southern (NYSE: NSC) – Eastern USA, competes with CSX
Union Pacific (NYSE: UNP) – Primarily competes with Burlington Northern

In Canada, there are two majors:
CN Rail (TSX: CNR) – Very large network from Prince Rupert and Vancouver on the Pacific to the St. Lawrence River and Halifax to the Atlantic and New Orleans to the Gulf of Mexico.
CP Rail (TSX: CP) – From Vancouver to the St. Lawrence River.

The railways trade at roughly the same valuations – very roughly, around 16-20 times earnings, depending on the company. There are reasons for these earnings differentials, mainly balance sheet factors.

Comparing CNR and CP, CP rail appears to be a tad cheaper right now, but both are relatively expensive for what you are purchasing – a utility-type company that will continue to be very profitable in the future as energy prices increase. They will once again decrease in valuation when the physical amount of goods in the economy slows down, like things did in the second half of 2008.

Although both companies are well run and profitable, they are classic examples of such companies that you would not want to invest in unless if you wanted to invest a huge amount of money in them for the purposes of stability. Even then, one would think that waiting for the next recession would give you a better entry point.

Start of a correction or just a pause?

The uptrend in the market indexes over the past 7 months has been noted by many, but due to geopolitical instability and the rising price of crude, the uptrend has taken a break. I note before when this also happened:

I do not know whether this is the “top” or whether this is a head-fake on the way to an S&P 500 at 1400. Time will tell.

Although one day does not make for the market’s direction, crude equities fell significantly today. The long commodity trade is very crowded and whenever this condition occurs, the risk of being long becomes progressively higher – momentum can only take you so far. Prudent investors will take money off the table and be patient, and let the greedy ones get burnt.

I wish I had something more to write other than that I have been continuing to take money off the table, and also putting capital into one other obscure US-based equity position that is not listed on any index, and appears to be relatively under-valued at the moment.

Places to park US dollars

If you have US cash collecting dust in your brokerage accounts, you are probably wondering if you can scrape a percent or two from them in relatively safe instruments instead of surrendering that money to your brokerage firm. After doing some exhaustive research on the matter, I believe there are three relatively low-risk ETFs to park them into, all of them offered by Vanguard and ranked from most risky to least:

  • Vanguard Short-Term Corporate Bond Fund (Nasdaq: VCSH) – MER of 0.15%, duration of 2.8, yield to maturity 2.2%, invested in relatively safe corporate securities;
  • Vanguard Short-Term Bond Fund (NYSE: BSV) – MER of 0.12%, duration of 2.6, yield to maturity 1.2%, invested in mostly government/treasury securities;
  • Vanguard Short-Term Government Bond Fund (Nasdaq: VGSH) – MER of 0.15%, duration of 1.8, yield to maturity 0.6%, invested completely in government/treasury securities.

There is still interest rate risk embedded in these securities and you never know if there will be a 2008-style meltdown in the financial markets that would only render BSV and VGSH as cash-like instruments.

Want more yield? You have to invest in junk bonds, a much more dangerous ballgame – and potentially more expensive for investors!

As readers know, I have been in a bunkering down mentality with respect to the markets. I am very defensively positioned and do not expect much returns in my portfolio in 2011.

Bank of Canada leaves rates at 1%

As predicted, the Bank of Canada leaves rates at 1%, citing:

The recovery in Canada is proceeding slightly faster than expected, and there is more evidence of the anticipated rebalancing of demand. While consumption growth remains strong, there are signs that household spending is moving more in line with the growth in household incomes. Business investment continues to expand rapidly as companies take advantage of stimulative financial conditions and respond to competitive imperatives. There is early evidence of a recovery in net exports, supported by stronger U.S. activity and global demand for commodities. However, the export sector continues to face considerable challenges from the cumulative effects of the persistent strength in the Canadian dollar and Canada’s poor relative productivity performance.

While global inflationary pressures are rising, inflation in Canada has been consistent with the Bank’s expectations. Underlying pressures affecting prices remain subdued, reflecting the considerable slack in the economy.

This language is similar to the previous release, and suggests that at the April 12th release that the Bank of Canada, barring any major events between now and then, will be keeping rates steady at 1% for that meeting.

BAX Futures are a shade higher, although it should be noted that the June future is at 98.545, implying a coin toss for a 0.25% rate hike at the May 31, 2011 announcement.