Canadian Pacific Rail (CP.TO)

$137 model price, 2.5% upside, but it will follow along EBV+5, so a year out it will be $149, so that would be your target price. Try to get it on pullbacks. CNR has a model price of $124.27, 13.5% upside, same story as CP.

It is time to sell. It is very fully priced and time to take profits. Canadian Rails are much more expensive than US. Would need to see a pull back of 5-10% to get into CNR. CP would need to come back to 16 times earnings. Prefers CSX and NSC railroads in the US.

Pershing (Square Capital Management) wants to sell some of its shares so there is a large overhang. This quarter, revenues could be a little bit light because of weakness in coal and grain. Revenue per ton mile was down 1% in September due to lower grain shipments. He sees EPS growth of 32% over the next 3 years given OR (Operating Ratios) improvements. This quarter, you could actually see ORs down 620 basis points, and you could have a pop from that. He would be using weakness to accumulate.

Chart looks like it has had some pretty good support at around $120. If it breaks below $120, all the moving averages are really tight. Often when you get this convergence, it is usually an indication that we move higher but periodically can be an indication that it actually goes lower. Stochastic is at an exceptionally high level, close to 100. You can pick this up at $120.

Trading at a higher multiple of earnings due to the fame of Hunter Harrison. As they continue to build value into the company, is it likely it will experience PE compression over time, or will they be able to maintain that high multiple of earnings? So far he is doing a great job, so multiples will expand or contract based on their success going forward. If they can continue to execute, the multiple can continue to expand a bit. Rails have been a little choppy in the last little while, so the group does not have quite the same tailwind that it had. This one, with very heavy exposure to moving commodities, is fighting a headwind.

Should we use Put Options to cover this stock? He prefers using Options when they are event driven. He would want to see a real reason to put it on in a hurry and take it off in a hurry.

An interesting story but feels it is overpriced. If you own and have made good money, he would seriously consider switching out of this one and into Canadian National (CNR-T) or a US rail.

Chart shows that this is setting up as a head and shoulders formation. When the neckline is broken, you can trade it to the downside. You also want some volume to support that.

*Short*. Transportation industry in general does not do well this time of year. Railroads are actually underperforming transportation at this time. Average decline for the railroad industry is about 2% but the chart on this company shows a distinct head and shoulders pattern and there is a good chance of this breaking giving a substantial downside all the way to $100.

Rails are important. To some extent, the need to ship everything out of Canada really gives the Canadian rails a lot of strength.

Sold his holdings in the high $70 as he felt there was no way that they could see those synergies as quickly as they had. He would not be buying this one at its current price.

He has a pair trade in which he is Long Canadian National (CNR-T) and Short this one. This had a very nice run over the last 12 months. Feels that Hunter Harrison has quite a following in the US which is giving it a lot of support. To put new money into the rails, he would look at the US. Likes Kansas City Southern (KSU-N), an increasing play on trade between Mexico and Canada.

Canadian Pacific (CP-T) versus Canadian National (CNR-T)? CNR is his favourite as it is less overvalued. Chart shows this had gone totally parabolic from mid-2012. Feels that it has to get back to the $115 area before he would even consider it.

With very few exceptions, he finds the multiples on railroads have gone up excessively. This one is trading at 20X earnings. Feels there is too much optimism built into the railroads.

He would be a little bit careful of this. It wouldn’t be his 1^st choice in rails. All of the rails right now have a gift, i.e. the arbitrage of oil. The Brent/WTI spread is allowing rails to carry oil and they are getting just about any margin they want for it. Pershing Square have decided to start selling their stocks which has pushed the stock price down. If they are selling, you should consider this as well, but do it over time.