The Bill Ackman train is leaving the station. Who’s willing to hop on board?
Ever since the activist hedge fund manager and head of Pershing Square Capital Management revealed in a regulatory filing in late October that he had taken a big ownership stake in Canadian Pacific Railway Ltd., investors have taken a pass on this opportunity to ride the rails with him.
CP shares initially jumped about 8 per cent on the news, but they have since slumped nearly 13 per cent from that early enthusiasm.
General market wonkiness over the past month is partly to blame. But clearly investors aren’t overly keen on CP, with or without Mr. Ackman.
Blame this reluctance on CP’s share price in relation to its peers: It stands apart, and not in a good way.
Railway stocks are cyclical investments that rise and fall with global economic strength and demand for commodities. However, because of their ideal position as fuel-efficient alternatives to trucks and the fact that no one is building railways any more, the overall performance of railway stocks has been impressive.
Over the past five years, Canadian National Railway Co. has risen 56 per cent, after factoring in dividends. CSX Corp., a U.S. railway, has risen 83 per cent and Union Pacific Corp. has risen 130 per cent.
And CP? It has fallen about 1 per cent – the sort of head-turning underperformance that gets investors like Mr. Ackman thinking up ways to improve the company.
He has his work cut out for him, and it will almost certainly involve more than installing new leadership. However, there are two big reasons investors should consider making CP their railway of choice.
For one, it’s a relative pipsqueak. The value of all CP shares stands at just $10-billion, about half the size of CSX and less than a quarter the size of Union Pacific. It’s a lot easier to turn around small companies than behemoths.
As well, it’s not as though CP has to reinvent what it means to be a railway in the 21st century. The road – er, rail – to success has been travelled by other railways.
To be sure, these stocks aren’t going to do well if the economy takes a big step back. But as a bet on the next cyclical upturn, CP looks like a good place to be.