Billionaire Bill Ackman Dumps Canadian Pacific Railway Limited: Should You Too?

Don’t make the mistake of selling Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) now.

| More on:
The Motley Fool

In an unprecedented move, activist investor Bill Ackman’s hedge fund Pershing Square Capital Management offloaded its entire stake of 9.8 million shares in Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) on August 3, valued at about $1.9 billion.

Interestingly, Canadian Pacific has been among Ackman’s most successful investments; the stock has almost quadrupled since 2011 when Ackman first bought the stock. So what could have compelled Ackman to exit his entire stake in a company that made a remarkable turnaround thanks to his investor activism?

Ackman smartly sold at the top

Ackman’s interest in Canadian Pacific showed signs of waning when he sold a large tranche in April. The stock’s decline since the middle of last year didn’t go down well with Ackman–Canadian Pacific lost 10% between July 2015 and April 2016 at a time when peer Canadian National Railway Company (TSX:CNR)(NYSE:CNI) stock had rallied almost 7%.

Ackman was perhaps waiting for a slight recovery to offload his remaining stake. If you look at Canadian Pacific’s price chart, it doesn’t take too long to realize that Ackman sold his stake around the only two peaks the stock has formed so far this year.

CP Chart

CP data by YCharts

Why Ackman exited Canadian Pacific

Ackman’s latest move comes at a time when low oil and commodity prices have hit shipments at railroads. In its second quarter Canadian Pacific reported 12% and 16% declines in revenue and net income, respectively. Crude, coal, grain, and potash were some of the worst-hit segments.

The most disappointing number, however, was Canadian Pacific’s operating ratio–a key metric that gauges efficiency at railroads and should be low–which increased a percentage point to 62% in Q2. Comparatively, Canadian National reported a record-low quarterly operating ratio of 54.5% for its second quarter.

Those numbers may have worried Ackman, raising concerns about a slowdown in the railroad industry and the potential upside in Canadian Pacific stock after its massive run-up in the past five years. Ironically, Canadian Pacific is also trading at a premium to the better-performing and higher-dividend-paying Canadian National based on almost every key metric, be it trailing P/E, PEG ratio, or price-to-book ratio.

Canadian Pacific faced a major setback earlier in the year when it had to drop its US$30 billion bid to acquire Norfolk Southern–a move that Ackman was backing. With no alternative growth plan in sight, end markets looking weak, and Canadian Pacific having already found a footing in the industry without much scope for investor activism, Ackman had quite a few reasons to exit.

What’s more, Canadian Pacific’s CEO Hunter Harrison, who came to the helm thanks entirely to Ackman’s activism, is also set to retire in a year’s time.

Why you shouldn’t follow Ackman

I wouldn’t encourage investors to follow suit if they have a longer-term perspective. Canadian Pacific proved its mettle under Harrison’s leadership, more than doubling its net profits and improving its operating ratio dramatically since 2012.

Even now things don’t look as sombre when you consider the company’s plans to add jobs in coming months to push revenue if the Canadian grain crop hits record volumes. In fact, Canadian Pacific is even optimistic about hitting double-digit growth in earnings per share this year at sub-60% operating ratio. Combine that with the company’s recent dividend increase of 40%, and you can safely vouch for management’s focus on increasing shareholder value.

Selling the stock at such a time simply doesn’t make sense.

Should you invest $1,000 in Aurora Cannabis right now?

Before you buy stock in Aurora Cannabis, consider this:

The Motley Fool Stock Advisor Canada analyst team just identified what they believe are the Top Stocks for 2025 and Beyond for investors to buy now… and Aurora Cannabis wasn’t one of them. The Top Stocks that made the cut could potentially produce monster returns in the coming years.

Consider MercadoLibre, which we first recommended on January 8, 2014 ... if you invested $1,000 in the “eBay of Latin America” at the time of our recommendation, you’d have $21,345.77!*

Stock Advisor Canada provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month – one from Canada and one from the U.S. The Stock Advisor Canada service has outperformed the return of S&P/TSX Composite Index by 24 percentage points since 2013*.

See the Top Stocks * Returns as of 4/21/25

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Neha Chamaria has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

Confidently Navigate Market Volatility: Claim Your Free Report!

Feeling uneasy about the ups and downs of the stock market lately? You’re not alone. At The Motley Fool Canada, we get it — and we’re here to help. We’ve crafted an essential guide designed to help you through these uncertain times: "5-Step Checklist: How to Prepare Your Portfolio for Volatility."

Don't miss out on this opportunity for peace of mind. Just click below to learn how to receive your complimentary report today!

Get Our Free Report Today

More on Investing

Stethoscope with dollar shaped cord
Investing

1 Magnificent Healthcare Stock Down 46% to Buy and Hold Forever

This TSX healthcare technology stock is trading at a considerable discount but boasts substantial long-term growth potential. It can be…

Read more »

calculate and analyze stock
Investing

Where I’d Invest $6,000 in The TSX Today

I am bullish on these two TSX stocks due to their solid underlying businesses and healthy growth prospects.

Read more »

Silver coins fall into a piggy bank.
Stocks for Beginners

Where I’d Invest My Savings in the TSX Today

If you have some savings ready to invest, then these three investments are top choices among analysts.

Read more »

Dividend Stocks

This Canadian Monthly Dividend Stock Pays a Stunning 9% Yield

Pro REIT is a Canada-based real estate company that offers you a forward yield of 9% in 2025. Is this…

Read more »

clock time
Bank Stocks

1 Magnificent Financial Stock Down 23% to Buy and Hold Forever

This top TSX financial stock is trading well below its recent peak, but its long-term fundamentals remain rock solid.

Read more »

dividend growth for passive income
Bank Stocks

This Canadian Bank Pays 4.75% and Could Double Your Money by 2030

A Canadian bank is a top pick for its lucrative dividend and potential to double your money in five years.

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

How I’d Invest $7,000 in My TFSA for $660 in Tax-Free Annual Income

Canadians looking for ways to make the most of the new TFSA contribution room should consider investing in these two…

Read more »

oil and natural gas
Energy Stocks

1 Magnificent Canadian Energy Stock Down 23% to Buy and Hold for Decades

This oil and gas producer has increased its dividend annually for more than two decades.

Read more »