The fallout of the coronavirus pandemic caused Canadian Pacific Railway to drastically reduce its guidance. Revenue ton-miles, an industry keystone, will fall so much that earnings per share are expected to stay flat for the entire year of 2020. (Revenue ton-miles represent the money a company makes for every volume of freight that is transported.) Investors think the worst is behind the company and continue to support it, keeping the price of the stock relatively resilient.
Canadian Pacific certainly may be playing the game of underpromise and overperform. The company actually set a record for the number of grain shipments it transported during the last 3 months. Executives continue to downplay freight volumes, claiming they will be depressed. The company did report a 6% drop in net income although it increased its revenues by 16% year over year — certainly a respectable result for what industry analysts call “unprecedented times.”
How to Buy Canadian Pacific (NYSE: CP) Stock and Options
You can buy Canadian Pacific through the purchase of stock, options or industry-specific mutual funds and exchange-traded funds (ETFs). CP is listed through the New York Stock Exchange (NYSE), which makes it available through all major brokerages unlike many stocks under $10 in its industry.
The first step to buying into Canadian Pacific is to choose a reputable brokerage. Doing so will help you avoid slippage and input errors. No matter how well the company performs, you need to buy in at a good price to optimize your returns on the investment. This text will focus on buying options because of its slightly more difficult process.
Pick a Brokerage
As an established stock on the NYSE, Canadian Pacific options should be easy to buy without any added commission.
Because every broker carries CP, you can focus your efforts on finding the broker that is most attractive to you. If you are using an offshore broker, make sure it is regulated through a prominent financial authority. You will need regulatory protection for your basic information and your accounts when moving money in the market.
Choose Strike Price
If you believe the coronavirus has beaten down the price of Canadian Pacific, you should buy call options. Call options move in tandem with the CP price in a leveraged way. Each call option is a contract that controls 100 shares of CP. The contract gives you the right to “call” shares away from an option seller on the expiration date at a predetermined strike price. If the CP price is at or above the strike price on the expiration date, the call executes.
The most important decision of your call option order is the strike price. Strike prices are listed in option chains. Check with your broker for the details of how these are listed.
CP options usually move with the CP stock price, but they move with leverage. For instance, if Canadian Pacific goes up 5% in a day, a call option may gain 54%.
Choose Expiration Date
The last day that your call option contract is valid is the expiration date. The time value becomes 0 on that day. Any value the option keeps is known as an intrinsic value because the option is “in the money.”
Pick your expiration date based on the length of time you want to hold the contract.
Decide How Many Contracts
After the expiration date, you will pick the number of call options you want. Choose this based on the number of shares you want control over during the trade.
If you choose a Canadian Pacific call option at a strike price of $320, you will call 100 shares of Canadian Pacific to yourself at $320 if the price is at or above $320 on the expiration date. If the price is less than $320 on the expiration date, the option is “out of the money,” considered worthless, and will not execute.
Watch Stock Price
Because energy and transportation are being heavily affected by the coronavirus, those industries are being carefully watched. CP is often one of the more volatile premarket movers. You can make a purchase of CP stock in the premarket but not options.
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Canadian Pacific Stock History
The Canadian Pacific Railway Limited stock began to trade on the NYSE on October 3, 2001, after Canadian Pacific Limited spun off its railway operations. Its exposure to the public markets helped its image and bottom line. In subsequent years, the company enjoyed a rise in freight revenues and was named a top Canadian employer by several publications. The company also trades on the Toronto Stock Exchange under the ticker symbol CP.
CP began its NYSE run humbly in the stocks under $20 category. The stock price experienced major growth in 2012. After a pullback from 2015-2016, CP began a 4-year bull market toward its current levels.
Pros to Buying Canadian Pacific Stock
Canadian Pacific is a strong company with plenty of cash reserves to withstand the coronavirus.
- Earnings: CP earnings continue to rise faster than its competition even in the face of the coronavirus.
- Analyst sentiment: Industry specialists overwhelmingly expect that CP will be able to retain its earnings performance.
- Stability: With a cash pile to see it through low points, CP won’t have to worry about crushing debt slowing its operations even if there is a 2nd wave of COVID.
Cons to Buying Canadian Pacific Stock
Depending on how you structure your portfolio, you may want to consider these points before buying into CP.
- Limited upside: The resilience of the CP stock and quick recovery following March 52-week lows means there may be less upside to the stock than some laggards.
- A high P/E: Canadian Pacific’s price-to-earnings (P/E) ratio is higher than its competitors (19.7 to 13 times), which speaks to the positive sentiment it has with smart money. But an overly high P/E can spell pullbacks if CP is unable to maintain its returns for any reason. How hard will a second coronavirus wave hit the market? No one is betting for a return to March, but Mother Nature is undefeated whenever she wants to be.
- Industry crunch: Transportation may not be the best investment considering the entire market. Analysts predict earnings will grow by 3.9% per annum over 3 years, which is a far cry from the 22% they predict for the general market.
Smooth Sailing on the Pacific?
Canadian Pacific will certainly never be in the penny stocks under $5 range, but that doesn’t necessarily guarantee optimized returns for investors. If you are looking for a solid company with a good balance of upside and resilience, then CP may be for you. Those with a more risk-tolerant profile may want to search elsewhere for short-term returns.