Should New Investors Steer Clear of These Transport Stocks?

Air Canada (TSX:AC)(TSX:AC.B) and two other big-name Canadian transport stocks may offer some income to new investors, but is there too much risk attached?

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While Planes, Trains and Automobiles may be a lot of people’s favourite John Candy movie, it’s also a pretty solid Canadian investment strategy. Below are three representative stocks from these three transport industries, along with a few of the stats that a sharp-eyed would-be investor should be aware of. Let’s take them for a test drive!

Air Canada (TSX:AC)(TSX:AC.B)

If you’d bought Air Canada half a decade ago, you’d have been rewarded by its five-year returns of 470% if you were still holding it today. While that’s clearly an impressive percentage, when you contrast it with the market’s 5% returns over the same period, you have a TSX index transport stock that’s soared over the competition — even the Canadian airlines industry “only” returned 131.3% for the same duration.

Undervalued by almost nine times its future cash flow value, potential Air Canada investors have a heady mix of portfolio fuel here from a hefty five-year average past earnings growth of 41.7% to 50.1% expected annual growth in earnings. However, it’s overvalued in terms of earnings and assets, with a P/E of 53.4 and P/B of 2.2.

Canadian Pacific Railway (TSX:CP)(NYSE:CP)

Would-be investors in Canadian Pacific Railway should be reassured that the company makes good use of its investments, with an expected ROE of 30.5% over the next three years — something that seems reasonable on the heels of a past-year return on equity of 29%.

This popular TSX index stock pays a small dividend yield of 0.94%, which is augmented by an 8.7% expected annual growth in earnings. Its negative one-year past earnings-growth rate is alleviated somewhat by a 16.2% five-year average, though a so-so balance sheet (see a debt level of 131% of net worth) and overvaluation (from a P/E of 20.2 to a P/B of 5.8) suggest caution should be exercised.

Magna International (TSX:MG)(NYSE:MGA)

A high-quality TSX index stock in a tough industry that’s faced a challenging year, and with a potentially bumpy economic landscape ahead, Magna International nevertheless has a fairly decent balance sheet and attractive valuation.

While its one- and five-year past earnings-growth rates of 4.1% and 6.8%, respectively, may be on the low side, they are at least positive, and with below-threshold debt of 39.3% of net worth, there’s some indication that this stock is reasonably safe to hold for the long term.

Decent valuation is indicated by a P/E of 7.5 and market-weight P/B of 1.5, while a dividend yield of 2.91% is on the table. Though Magna International may be expecting a contraction by 2.2% in earnings, its involvement in the electric vehicle space is a potential boon.

The bottom line

Air Canada fans may want to balance a high debt level of 164.9% of net worth with a potential 26.6% future ROE; in other words, the potential for upside is there, though not without some risk, while railway investment is still seen as a defensive play and remains a core part of infrastructure investment. Fans of auto stocks and electric vehicles, likewise, have a moderately strong buy in Magna International, with its mix of value and passive income.

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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 Victoria Hetherington has no position in any of the stocks mentioned. Magna is a recommendation of Stock Advisor Canada.

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