19 July 2007
CP Rail Investors Climb Aboard CN Rail
Wondering why Canadian National Railway shares are flying when
it's Canadian Pacific Railway that's the takeover target?
Investors aren't confused. The jump in CN's price on Wednesday - the stock was up 5 percent - reflected an age-old
practice known as rotation, which see portfolio managers dump one stock from a sector, in this case CPR, and shift their holdings to a
rival with greater perceived upside. It was a trade the analyst community whole-heartedly encouraged.
Fundamental-focused fund managers, who still count for a great deal of market activity, behaved just the way you'd expect
on Wednesday. When CPR shares began trading, after the railway confirmed that Brookfield Asset Management had made overtures, the stock
instantly soared by 15 percent, trading through the day between $88 and $91, a premium to any valuation based on rational measures such
as price-to-earnings ratios.
So the fundamental types sold, and the hedge funds rushed in, and more than 7.8 million CPR shares changed hands.
While many dealers hid their buying and selling by sending it through the Toronto Stock Exchange's "anonymous" brokerage
account, TSX data shows TD Securities and National Bank Financial as leading traders of CPR stock.
In simple terms, CPR sellers had $690-million to re-invest on Wednesday. Many of the fundamental types
holding this cash decided that they still liked the idea of owning a railway.
There's good reasons for taking this view, as global demand for Canadian resources is rising, and freight trains move these goods, along
with improving cash flow, and an industry-wide move to give cash back to shareholders.
So as they sold CPR, a great many money managers simply poured their money right back into railways by adding CN to their
portfolios.
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