A CN train passes through the Macmillan Yard in Toronto - Date unknown Brent Lewin.

8 December 2011

End of the Line for Canadian Rails Rally?

Toronto Ontario - The impressive run in Canadian rail stocks this quarter is wearing thin, says Martin Roberge, portfolio strategist and quantitative analyst at Canaccord Genuity.
 
Both Canadian National Railway Co. and Canadian Pacific Railway Ltd. are up large since mid-September, rising 25 percent and 40 percent respectively. For the year, CN is up 20 percent, while CP is flat.
 
Mr. Roberge said the stellar performance is thanks to a jump in refined petroleum products this year as pipeline capacity needed to transport oil to global markets remains tight.
 
He said oil producers have been willing to pay higher prices to rails in order to bypass the glut at Cushing, a major trading hub for crude oil in Oklahoma.
 
But now, signs are emerging that the glut is clearing, which could put a cap on the rails pricing power, a troubling scenario given the recent stock market run.
 
"Risk of price erosion happens when rails are much overvalued relative to the market," Mr. Roberge said.
 
"This toxic mix bodes ill for further relative price strength, hence opening the door for a rotation into other industrials which are trading at/near multi-year lows relative to rails."
 
David Pett.