Canadian National R.R. (CNR.TO)

There is an opportunity here. The stock has really pulled back. It has been hurt by the slowdown in the Canadian economy, and demand for commodities has really hampered the business. For a long-term investor, there is upside. Businesses are cyclical. Has a low operating ratio. Always generates a lot of free cash flow.

Grain and fertilizers are 15.8% of their business. Coal is 4.1%, forest products are 13.6%, energy is 19.8%, automobiles 9.2%, metals are 12.6%, intermodal is 23.3% and diversified is 5.5%. Even in the face of a slowdown in volumes, it has managed a price increase, reacted very quickly by putting a freeze on hiring, and retired 200 locomotives and 10,000 railcars. They still produced a record 56.4% operating ratio.

Not a particularly good entry point. He is not positive on the rails. He would raise as much equity as he could at these high prices. 5.5 times its book value.

How will they do if a pipeline is not built? He thinks they will do better because that is where a lot of their revenue has been. Without a pipeline, it is the only way to get oil across the country. A great industry to be in, especially if oil turns around.

(Covered Calls. He is playing the last half of the year by taking some option premiums in with he expects that these 3 Top Picks will hold their own or rise. Yield on the total return is pretty attractive. Thinks we could be in a flat market until the end of the year.) He is selling January $82 Calls. As of yesterday the price was $3 with an annual dividend of $1.45. If it rises above $82, you are going to get called away, which would give you a 7% yield in 5 months and a 4.6% yield if it stays where it is. If it declines, it can go all the way down to $76.39 (based on these prices) before you lose any money.

He hasn't bought it yet. He is watching it. Same for CP. Rails had some weakness due to the commodities crash. Shipment of basic commodities are down. Thinks that the rail story is still a pretty good story. Canadian exports has been increasing this month which is good for CP especially. He owns a US rail carrier called CSX. This is a sector that he likes.

Likes this company and recently bought some. For the first time in years, you can buy this at a discount to the market multiple. A good, safe way to have some North American industrial. More of a north-south railway and Canadian Pacific (CP-T), so you get more exposure. Really good operating ratio.

Its period of seasonal strength is from around the end of October through until March of each year. Technically the stock has recently been in a downward trend and it is outside of its seasonal strength, so not a security that you would probably want to add to right now. Wait until October.

Increased their dividend by 20% plus this year. Over the last 5 years, their dividend has gone up 13% annualized. The stock is down because of lower volumes of coal, grain and petroleum. However, volumes are up on intermodal and autos. Their guidance is low single digit earnings growth and he thinks that is still possible. Good value at this price. Dividend yield of 1.63%.

The majority of the North American rail companies over the last 4-5 years have been great growth businesses, not only from overall volume growth, but new industries like crude by rail. That has all slowed down. Rails had been trading, up until early this year, in the low 20s multiples which were at a premium growth. Have now backed off to about 17-18 times which is about the market multiple and the growth outlook is for about 8%-10%. He thinks they are fair value. Look for a pullback below market valuations as an entry point.

This has had a fair pullback. These were the leading stocks going up; transports are often anticipating better times. Feels they are reasonably priced but he is not in the sector right now. If you are a long-term holder, you will be okay.

Rails have been badly beaten up recently. Rarely do income investors get to buy such opportunities. When the Panama Canal expansion completes, who has the lines all the way down to Central America?

Does very well from mid October to mid April. It has come down and broken a support level. Wait until October.

He is very interested at this price. Has owned shares for a number of years. It is his favourite rail name right now. It has gotten down to a point where he is fretting on his holdings, but it has bounced off a $71 level, and it is really attractive down here. He thinks this is generally a consolidation of gains that they have had over the last 5-6 years.

A buying opportunity. There are about 6 or 7 railroads in North America. The intermodal business has been a little weak. A well run company with incredible dividend growth over the years. It is safe and will continue to grow. The stock is off because the business is soft in a couple of categories. He just looks at it as a buying opportunity.