Sometimes it’s hard to be a long-term investor, especially when a stock you’re patient with is still underperforming. It is indeed one thing to settle for a year or two of market-based returns. However, it’s another thing entirely when the stock of a supposed hero with a wide dividend growth moat drags on for more than five years. At what point does an investor throw in the towel and find something that’s a little more timely and won’t be left behind as the broad stock market soars higher?
That’s the big question for long-term value investors. And it’s one that doesn’t happen all that often among retail investors these days, mainly because many investors wouldn’t think twice about dumping a laggard for something with a bit more momentum. After all, why stay in a trap when you can make gains with something that works? And why settle for market underperformance when you can simply bet on the broad market for such a low fee with a vanilla index exchange-traded fund (ETF)?
It is indeed difficult to hold on to the names that have fallen short of our expectations. But before you remove such laggards from your portfolio (especially your tax-free savings account or registered retirement savings plan), investors should ask themselves what has changed and whether a catalyst may finally emerge that allows a lagging company to make up for lost time on its way to becoming a leader again.
Sometimes removing a name from the portfolio is the right thing to do, or at least dropping it if there is no plan in place or if there is a management team that has made a habit of not performing.
CN Rail stock is lagging, but it’s still worth holding
In this piece we look at a five-year laggard CN track (TSX:CNR), which is up 0% over the past five years, with the price moving choppily.
Sure, the 2.61% dividend yield is enticing, but relative to the TSX Index, CN Rail is a big laggard, and some may wonder if it’s time to move on from the fallen rail line while it’s still in a bear market, down 22% from its all-time high in 2024. The shares have continued to rise in recent quarters. And while the February gains are somewhat encouraging, I certainly wouldn’t view the move above $140 per share as an opportunity to lighten a position.
Personally, I see CN Rail as a great long-term asset, even as the company survives one of the toughest periods in recent history. Of course it has been a difficult five years, but I suspect the next five will be much brighter for the railway company. More easily comparable figures are on the horizon, and while the headwinds have not disappeared yet, I believe freight volumes will recover in due course, whether that is a few quarters, or a year or more.
But if you’ve been so patient, why wait any longer for an underperforming management team to deliver results?
Simply put, shares are too cheap at 17.4 times price-to-earnings (P/E) ratio, especially when you take into account the almost guaranteed dividend increases you’ll encounter if you hold them. While capital gains may be harder to come by, I think the worst is already baked in and the odds may be on their side as investors start to expect less from the railroad giant.
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