As the market and the 2 for 1 Index bounce around near all-time highs, it's hard to remain focused on, and abide by, the rather mechanical nature of the 2 for 1 Index methodology, notes Neil Macneale, editor of 2 for 1 Stock Split Newsletter.
One of the great strengths of 2 for 1, reinforced by its almost 25-year track record, is the discipline enforced by the buy one/sell one and monthly rebalancing approach to index management. When the market is going crazy, we just keep doing our thing.
With this in mind, I am adding Canadian Pacific Railway Ltd. (CP) to the Index for May's selection even though it's near an all-time high and has just split its stock 5 to 1.
However, for my own IRA account, and for the readers of this newsletter, I think it would be prudent to wait a bit before actually putting in a buy order for CP, as there is likely to be a bit of volatility for a while. For buyers, a low-ball limit order might be the way to go until the post-split picture comes into focus.
So, what's to like about Canadian Pacific in addition to its 5 to 1 split? At the moment, this is the smaller of the two major Canadian railroads. This will change when (if) the proposed merger with Kansas City Southern (KSU) is fully implemented — probably in mid-2022.
At that time, the merged company will be on the same plane as Canadian National (CNI) and CSX (CSX), a major US railroad. The merged rail line will be the only fully integrated Canadian USA Mexican system.
Warren Buffett likes railroads, owning BNSF outright through Berkshire-Hathaway; BSNF is the parent company of Burlington Northern Santa Fe.
Overall, I like railroads. The 2 for 1 Index has included Union Pacific (UP) and Canadian National (CNI) in the past. For CP, we find a super solid business, comparing well to all its peers, and poised to benefit significantly when (if) the synergy with KSU is fully realized.
In the meantime, CP has been growing earnings at over 12%/year over the last five years, has a healthy cash flow, and is more profitable than the average high-tech firm. The 0.79% dividend has been improving and interest on debt is well covered.
There is general agreement in the press, regarding the merger with Kansas City Southern, that Canadian Pacific has the superior management and that Canadian Pacific's best practices and cost controls will improve the operations of the Kansas City Southern routes.
Theoretically, this should result in a merged company that would be greater than the sum of its parts. Even if the merger fails, CP would remain a strong company and would still be a good fit for the 2 for 1 Index.