Riding the rails to stay ahead of inflation

With inflation at levels not seen since the early 1980s, Fidelity’s Sammy Simnegar points out that it’s becoming increasingly important to invest in companies that can maintain their profitability in the face of rising costs.

“Canada’s two primary rail carriers, Canadian Pacific Railway and Canadian National Railway—fund holdings as of February 28—exemplify the kind of inflation-resistant businesses I like to own,” explains Simnegar, portfolio manager of Fidelity^® International Capital Appreciation Fund (FIVFX).

In managing the diversified international equity strategy since 2008, Simnegar favors high-quality growth stocks benefiting from long-term “mega trends,” as well as his three “Bs”—brands, barriers to entry, and “best in class” management teams.

He notes that these railway carriers appeal to him because they can pass through increases in fuel and other expenses to their customers through fuel surcharges and consumer price index escalators.

What makes them even more attractive is the fact that elevated fuel prices and wage gains disproportionately penalize trucking firms, as this business tends to be much less fuel-efficient and more labor-intensive than rail transportation, according to Simnegar.

“Further bolstering the investment case for these stocks is Russia’s ongoing invasion of Ukraine,” he says. “The resulting supply disruption has boosted demand for Canadian exports, such as grain and potash, the latter being a critical fertilizer component.”

For better or worse, another favorable trend Simnegar points to is deglobalization—a byproduct of the COVID-19 pandemic—which he believes appears set to boost North American onshoring and energy production, thereby accelerating the volume of cargo transported by Canadian Pacific Railway and Canadian National Railway.

Simnegar is particularly optimistic about the former, given the company’s pending merger with U.S. carrier Kansas City Southern, which should be completed by midyear.

This union will create the only direct rail route from Canada to Mexico, offering unrivaled speed and service that is sorely needed to help ease supply-chain congestion, Simnegar contends.

These favorable tailwinds, even in the face of generationally high inflation, could provide both companies a source of long-term growth, Simnegar concludes.

For specific fund information, including full holdings, please click on the fund trading symbol above.