It’s been a tough year for the Canadian rails, which are trading at some seriously depressed valuations. This is Tim Shufelt filling in for Scott Barlow, and today we’re looking at whether the railways might return to their former glory. We’ll also examine how exchange-traded funds are eating the world. Plus, a look at the moral panic that greeted the transformational technology that was … the Walkman?
IndustrialsOnce market darlings, now derailedOpen this photo in gallery:
Are the Canadian rails about to turn the corner?Andrew Vaughan/The Canadian Press
Pop quiz, hotshot. What’s the single-best performing industry on the TSX over the last 30 years? If you guessed the rails based solely on the theme of this newsletter, you’re right!
In a market where the big banks and natural resources get all the attention, the Canadian railway duopoly is the real toast of the TSX. Over three decades, the rails collectively posted an average return of more than 15 per cent a year, including dividends. They were the ultimate market darlings, right up until they weren’t.
Over the past year, the rails have been entirely left out of a booming bull market. Both Canadian National Railway Co. (CNR-T) and Canadian Pacific Kansas City Ltd. (CP-T) sit in the basement of the TSX performance-wise, with negative returns while nearly all else points up and to the right. Over the past 12 months, CP has trailed the S&P/TSX Composite Index by nearly 30 percentage points, CN by close to 40 percentage points.
No mystery as to what’s dragging them down. Rails are highly trade dependent and tariffs are not good when you’re in the business of moving stuff.
“A few months ago, the trade deal seemed imminent,” Tracy Robinson, CN’s chief executive officer said in an earnings call in July. “Instead, there is an increasing uncertainty around the tariff and trade environment.” The company said it is seeing the effects of tariffs on its forest products, metals, and automobile shipments.
But the companies have said all along that they can stickhandle these radical shifts in trade policy. The Globe’s David Berman made this case a few months ago.
One obvious draw for the contrarian investor is valuation. Both rails are trading at substantial discounts to the S&P 500 index — 2.9 points on a forward price-to-earnings basis for CP, and 5.7 points for CN, Kevin Chiang, an analyst at CIBC Capital Markets, said in a note to investors this week.
“This is the widest range we have seen the Canadian rails trade at relative to the market and the first time we have seen both CN and CP trade at two or more standard deviations versus the five-year mean spread.”
Looking back at the companies’ average valuations over the last five years, both are trading close to their floors, Mr. Chiang added.
“We believe the downside risk to both CN and CP is limited at these levels.”
jayk7/iStockPhoto / Getty Images
Investment FundsThe great ETF population boom
There are now more exchange-traded funds listed in the U.S. than there are individual stocks. Morningstar data cited by Bloomberg puts the ETF count at about 4,300, compared to 4,200 operating companies.
Behold the New York ETF Exchange, also featuring stocks.
Incidentally, the TSX crossed this same threshold back in 2020. Since then, ETFs have multiplied frantically while the population of stocks has continued to decline. As of the end of July, there were 1,239 ETFs and other structured products trading on the TSX, compared to 688 corporate listings.
Investor choice is a good thing, up to a point. As the financial industry continually tests the limits of what can be stuffed in an ETF, retail investors are bombarded with risky products they may not fully understand. Leveraged, inverse and crypto ETFs are some of the hottest growth categories in the fund industry.
The original concept of an ETF was to give investors broad market exposure in a single ticker. Single-stock ETFs flip the invention on its head by using leverage to boost the returns of a single stock. There have been 42 such ETFs introduced to the Canadian market so far this year, according to National Bank Financial.
Fund providers have even begun packaging together single-stock ETFs. One example is the Harvest Diversified High Income Shares ETF (HHIS-T), which holds a portfolio of ETFs tracking “trending” companies, like Coinbase Global Inc., Palantir Technologies Inc., and Tesla Inc.
Eventually, there will be an ETF for every individual publicly listed company. Then we can lump them all together and call it a stock market.
DiversionsThe war on the Walkman
Some of us might look back on the advent of early portable music headsets with a fond nostalgia for a simpler time. But the humble Walkman was met with the same sort of moral handwringing 45 years ago that artificial intelligence is subject to today.
“The Walkman, critics claimed, was more than just music to one’s ears. It was a tool of societal disconnect,” Louis Anslow writes on the website Freethink.
There were practical concerns about the safety of Walkmans. Hearing loss. Accidents involving inattentive pedestrians. Some saw in the Walkman the rise of a dangerous kind of individualism and the loss of community.
“This chapter in techno-pessimism is a good reminder that nostalgia tends to elicit amnesia about the resistance new technologies once faced,” Mr. Anslow said.
The essentials
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What’s up next
It may be the end of August, when “out of office” messages crowd inboxes and trading volumes resemble the Christmas period, but there’s a lot to keep investors entertained for the rest of this week. Thursday brings CIBC and TD earnings, wrapping up what has been a very upbeat reporting season for the Big Five banks so far. The day will also bring the latest second-quarter U.S. GDP reading.
Canada gets it own GDP numbers on Friday; the Street expects a second quarter mild contraction of economic activity. There’s some potential market-moving U.S. economic reports on tap as well that day, including personal spending and income, and perhaps most notably the PCE price index for July. The Fed keeps tabs on that one very closely, and right now the market expects a rise of 2.9 per cent.
See our full earnings and economic calendar here