We recently compiled a list of the 7 Most Profitable Canadian Stocks To Invest In. In this article, we are going to take a look at where Canadian Pacific Kansas City (CP) stands against the other profitable Canadian stocks.

Economy of Canada

According to a report by S&P Global, Canada’s economy is showing signs of recovery, with growth expected to pick up pace in the coming years. Although the forecasted GDP growth of 1.2% in 2024 and 2.0% in 2025 is still below the country’s potential growth rate of 1.8%, it’s a step in the right direction.

The labor market is experiencing a slowdown, with reduced hiring and rising unemployment. Whereas, wage growth is currently outpacing productivity growth, which is inconsistent with the 2% inflation target. The unemployment rate is expected to reach 7% by the end of 2024 before declining in 2025.

However, the Bank of Canada is turning its focus to potential risks to economic growth, despite the current slowdown. The BoC has already cut interest rates three times in a row and is expected to make further 25 basis point cuts in the fourth quarter and January.

The predicted recovery in 2025 is expected to be driven by investments, particularly in residential and non-residential sectors, rather than consumer spending. Consumer spending is likely to remain subdued due to the cumulative impact of higher interest rates. The effectiveness of changes to immigration policies is a key uncertainty in the forecast.

Canadian households, which hold the highest debt levels among G7 countries, have been severely impacted by interest rate increases since 2022. Real consumer spending per person has declined in five of the last six quarters, with an even more pronounced effect on home-building. However, consumer spending and residential investment are expected to increase as interest rate decreases help restore demand.

Warren Buffett on Investing in Canada

In Berkshire’s 2024 annual meeting, legendary value investor Warren Buffett expressed his confidence in investing in Canada, stating that his firm has a significant presence in the country with many operations and investments across various entities. He feels comfortable investing in Canada, just like in the US, because he understands the business environment and economy. Buffett noted that the Canadian economy moves closely with the US economy, and the results from his firm’s businesses with Canadian operations are consistent with those in the US.

Greg Abel, Vice Chairman of Berkshire, stated that the company has a significant presence in Canada across many of its operating entities. He noted that the company is always looking to make incremental investments in Canada because it’s an environment they’re comfortable with. Abel specifically mentioned that Berkshire has made substantial investments in Alberta, particularly in the energy sector, and that the Canadian economy is consistent with what Berkshire sees in the US.

Investing in Canada offers a unique opportunity to tap into the growing demand for green hydrogen and its various applications. The region’s abundant natural resources and innovative technologies make it an ideal location for the production of green hydrogen, which can be leveraged to create new industries such as ammonia and fertilizer production, as well as green steel. With that in context let’s take a look at the 7 most profitable Canadian stocks to invest in.

Our Methodology

For this article, we used Finviz and Yahoo Finance stock screeners plus online rankings to compile an initial list of the 40 largest companies in Canada by market cap. From that list, we narrowed our choices to 7 stocks with positive TTM net income and 5-year net income growth informed by reputable sources, including SeekingAlpha, which provided insights into 5-year growth rates, and Macrotrends, which supplied information on trailing twelve-month (TTM) net income. Then we sorted the stocks in ascending order, according to their hedge fund sentiment, which was taken from our database of 912 elite hedge funds as of Q2 of 2024.

Why do we care about what hedge funds do? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Canadian Pacific Kansas City (NYSE:CP)  

TTM Net Income: $2.57 Billion  

5-Year Net Income CAGR: 8.42%  

Number of Hedge Fund Holders: 44  

Canadian Pacific Kansas City (NYSE:CP) was formed in 2023 as the result of the merger between Canadian Pacific and Kansas City Southern. Canadian Pacific Kansas City (NYSE:CP) plays a vital role in the logistics by operating the rail network across Canada, the United States, and Mexico. The company provides a critical transportation link for the cross-border trade of goods such as grain, oil, and intermodal cargo for industries such as agriculture, energy, and manufacturing.

In the second quarter, Canadian Pacific Kansas City’s (NYSE:CP) revenue surged 13.5% year-over-year to $3.6 billion, driven by a 6% increase in volume and higher freight rates. The company’s bulk business saw significant growth, with grain revenues rising 17% year-over-year and potash revenues jumping 24% year-over-year. The merchandise business also performed well, with Energy, Chemicals, and Plastics (ECP) revenues increasing 10% year-over-year. Additionally, the company’s MMX 180/181 cross-border Mexico service saw a 50% volume increase since the end of 2023. This strong growth momentum is expected to continue into the third quarter, driven by a robust Canadian grain harvest.

Canadian Pacific Kansas City (NYSE:CP) is well-positioned for continued growth, driven by revenue synergies from the merger and a strong Canadian grain harvest. The company’s net income for the trailing twelve months (TTM) stands at $2.57 billion, with a 5-year compound annual growth rate (CAGR) of 8.42%. In the second quarter, 44 hedge funds held the company’s stock, with stakes worth $7.71 billion.

Overall CP ranks 7th on our list of the most profitable Canadian stocks to invest in. While we acknowledge the potential of CP as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CP but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.