It\u2019s 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\u2019re looking at whether the railways might return to their former glory. We\u2019ll 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?<\/p>\n
IndustrialsOnce market darlings, now derailedOpen this photo in gallery:<\/a><\/p>\n Are the Canadian rails about to turn the corner?Andrew Vaughan\/The Canadian Press<\/p>\n Pop quiz, hotshot. What\u2019s 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\u2019re right!<\/p>\n 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\u2019t.<\/p>\n Over the past year, the rails have been entirely left out of a booming bull market. Both Canadian National Railway Co. (CNR-T<\/a>) and Canadian Pacific Kansas City Ltd. (CP-T<\/a>) 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.<\/p>\n No mystery as to what\u2019s dragging them down. Rails are highly trade dependent and tariffs are not good when you\u2019re in the business of moving stuff. <\/p>\n \u201cA few months ago, the trade deal seemed imminent,\u201d Tracy Robinson, CN\u2019s chief executive officer said in an earnings call in July. \u201cInstead, there is an increasing uncertainty around the tariff and trade environment.\u201d The company said it is seeing the effects of tariffs on its forest products, metals, and automobile shipments.<\/p>\n But the companies have said all along that they can stickhandle these radical shifts in trade policy. The Globe\u2019s David Berman made this case<\/a> a few months ago. <\/p>\n One obvious draw for the contrarian investor is valuation. Both rails are trading at substantial discounts to the S&P 500 index \u2014 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.<\/p>\n \u201cThis 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.\u201d<\/p>\n Looking back at the companies\u2019 average valuations over the last five years, both are trading close to their floors, Mr. Chiang added.<\/p>\n \u201cWe believe the downside risk to both CN and CP is limited at these levels.\u201d<\/p>\n Open this photo in gallery:<\/a><\/p>\n jayk7\/iStockPhoto \/ Getty Images<\/p>\n Investment FundsThe great ETF population boom<\/p>\n 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.<\/p>\n Behold the New York ETF Exchange, also featuring stocks.<\/p>\n 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.<\/p>\n 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. <\/p>\n 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. <\/p>\n Fund providers have even begun packaging together single-stock ETFs. One example is the Harvest Diversified High Income Shares ETF (HHIS-T<\/a>), which holds a portfolio of ETFs tracking \u201ctrending\u201d companies, like Coinbase Global Inc., Palantir Technologies Inc., and Tesla Inc.<\/p>\n 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.<\/p>\n DiversionsThe war on the Walkman<\/p>\n 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.<\/p>\n \u201cThe Walkman, critics claimed, was more than just music to one\u2019s ears. It was a tool of societal disconnect,\u201d Louis Anslow writes<\/a> on the website Freethink. <\/p>\n 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. <\/p>\n \u201cThis chapter in techno-pessimism is a good reminder that nostalgia tends to elicit amnesia about the resistance new technologies once faced,\u201d Mr. Anslow said. <\/p>\n The essentials<\/p>\n Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here<\/a> to visit our Inside the Market page. <\/p>\n Globe Investor highlights<\/p>\n Chinese stocks have surged to a 10-year high. Here\u2019s why some believe<\/a> the rally still has legs<\/p>\n The recent turn in the U.S. dollar has sparked renewed doubts<\/a> for Wall Street stock dominance<\/p>\n