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(B)(N) CP Canadian Pacific Railway Limited

June 4, 2013

Drama. Pershing Square Capital is on the platform and anticipates selling about 7 million of its 24 million shares in the Canadian Pacific Railway during the next several months, always at no more than 10% of the total daily volume which is, typically, 400,000 shares per day (The Canadian Press, June 3, 2013, Pershing Square Capital Management to sell seven million CP Rail shares).

They did the math and that means they’ll be selling stock every day for the next 170 trading days (six to twelve months, they rightly figure) in order to “right their portfolio” which is “sagging” on one end and if they sell 7 million shares at the current prices, they’ll get all their money back and still be the largest shareholder, which is not a bad payday for a little agitation in the Boardroom (ibid, The Canadian Press).

CP coal train on the Stoney Creek Bridge, B.C.

CP coal train on the Stoney Creek Bridge, B.C.

There are about 100 institutional owners that hold 123 million shares in all, or 70% of the total shares outstanding, and their portfolios might also need to be “righted”, so we might expect some “track noise” that puts downwards pressure on the stock price if people are unwilling to buy it at these elevated levels of $135 per share which is already twice what it was “worth” a year ago and three times as much as in 2009. Please see Exhibit 1 below.

However, not much has really changed since 2009. The dividend is $245 million this year for a current yield of 1% and is up +50% in dollar terms since 2009 and a stock price of about $40 to $50, but other things are the same: the shareholders equity is still about $5.5 billion; the total debt is still about $9.5 billion; and the fixed assets are still fixed (or moving) at about $13 billion; and the gross revenue is up at $5.7 billion from $4.4 billion, but the net income is down from $650 million to a miserly $490 million of which $245 million is going to be paid to the shareholders, and that leaves a lot less in the kitty since 2009 and this might be a rough year for rail if commodities don’t pick up.

In other words, it’s not the performance of the company that has improved so much; it is the performance of its shareholders, six of whom control 33% of the stock and another ten who control the balance to 50%, and are now holding it at $135 and looking for new buyers.

Our estimate of the downside in the stock price due to the demonstrated volatility is minus (-$18) per share during the next quarter, so we would not be surprised by any price between the current $135 and $117 or $153, but the July puts at $135 are pricey at $6 per share and there are no calls above $145 which sells for $2 today.

We could sell the stock today, or hold it between $135 and $145 (ha!) for the next month by taking some of our profits and buying the collar for $4 per share ($6 less $2); that’s still better than just buying the put at $130 for $4 or taking the stop/loss at $117 should there be any more excitement or shareholder distress absent Mr. Ackman and Pershing Square Capital.

Exhibit 1: (B)(N) CP Canadian Pacific Railway Limited – Risk Price Chart

(B)(N) CP Canadian Pacific Railway Limited - June 2013

(B)(N) CP Canadian Pacific Railway Limited – June 2013

Canadian Pacific Railway Limited is a holding company whose direct and indirect subsidiaries operate railways in North America. The main operating subsidiary of the Company is Canadian Pacific Railway Company.

(Please Click on the Chart to make it larger if required.)

The Price of Risk

The calculated Risk Price (SF) is a provably effective estimate of the “price of risk” which is “the least stock price at which the company is likeable” (Goetze 2009) and “likeability” is determined by the demonstrated factors of “risk aversion” – we want to keep our money and obtain a hopeful return above the rate of inflation – and the properties of portfolios of such stocks.

Stock prices that are less than the price of risk can be said to be “bargain prices” but with the risk attached that the company might never get a higher price other than that due to ambient volatility or “surprise”; on the other hand, investors who are willing to pay the “full price” above the price of risk, and buy and hold the stock at those prices, must also be confident, and have reason to believe, that the company will produce those values, absent new information.

Please see our Posts, The Price of Risk, August 2012 and The Nash Equilibrium & Its Stock Price, October 2012, for more information on the theory.

To see what else “risk averse” investing can do for us, please see our recent Posts, The Wall Street Put, April 2013, and earlier Posts such as The Dow Transports, March 2013, or The Risk Adjusted Dow, March 2013, or The Canada Pension Bond, February 2013, and for a more colorful description of investment risk and the application of the “price of risk” to mergers & acquisitions, please see our Post, Bystanders & Collateral Damage, April 2013.


We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product

The Perpetual Bond
“Alpha-smart with 100% Capital Safety and 100% Liquidity”
With No Fees and No Loads on Capital

For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to


Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are, now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.

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