Alert 1: Getting off the Rails–Round 2:

Investment Thesis: Last month, we recommended that investors sell a covered call on Canadian National Railway Co. (TSX: CNR, NYSE: CNI). We closed this position on June 21, for a profit of 38%.

The fundamentals as described last month have not changed: The stock remains somewhat expensive, profits are under pressure, and the dividend yield is only 1.9%. However, the share price bounced back over the past few weeks giving us the opportunity to reinstate the original strategy.

Option Strategy: Sell to open a covered call option with a strike price of C$82 with a Sept. 16, 2016 expiration at or above C$0.95 per option.

This will yield a C$95 premium per option (C$0.95 x 100). In addition to the option premium, the shareholder will earn the dividend (C$0.375 per share) before the option expires (except if the call is assigned before the dividend registration date) plus any capital appreciation up to the call strike price.

The most similar U.S. call option on CNI is the US$65 strike with an Oct. 21, 2016 expiration.

Alert 2: Don’t trip over TRP:

Investment Thesis: TransCanada Corp. (TSX: TRP, NYSE: TRP) has been on a tear over the past few months, adding almost 50% from its December 2015 lows and outperforming its main rival Enbridge by a considerable margin.

Some investor excitement around the stock was generated by the all-cash US$13 billion takeover of Columbia Pipeline Group at a 32% premium over the then prevailing market price. Management believes that the transaction, which closed on July 1, will be accretive to TransCanada profits, but the net benefits will obviously not be reflected in company profits anytime soon.

TransCanada is a high-quality operation, but we feel that its valuation is full: The stock trades at a 12-month forward EV/EBITDA (enterprise value to earnings before interest, taxation, depreciation and amortization) ratio of 14 times, which is a premium to the North American pipeline majors and above our fair-value estimate.

Option Strategy: Buy to open a protective put option with a strike price of C$58 and an Oct. 21, 2016 expiration at or below C$1.25 per option for a cost of C$125 (C$1.25 x 100).

Although this trade is primarily for existing TransCanada shareholders who wish to protect their holdings against downside risk, it can also be used by investors as a speculative trading strategy.

The most similar U.S. call option on TRP is the US$45 strike with a Nov. 18, 2016 expiration.

Alert 3: A New Dividend Champion:

CAE Inc. (TSX: CAE, NYSE: CAE) is a global leader in the field of flight-simulation technologies and training services for commercial, business and defense customers worldwide. The mid-cap company has been in operation for several decades and counts most of the top global airlines as well as the U.S. and Canadian defense forces, and NATO among its customers.

We like CAE’s leading position in a growing global industry, and we think there is reasonable growth ahead. Consensus forecasts indicate net income per share growth of 12% per year between 2016 and 2019.

The stock’s valuation is fair, with a 12-month forward P/E (price to earnings) ratio of 16 times and an EV/EBITDA (enterprise value to earnings before interest, taxation, depreciation and amortization) ratio of 8 times.

The current dividend is safe and is expected to grow at 10% to 15% annually, though the yield is on the low side, at 1.9%.

Our fair-value estimate is C$16.50, or US$12.70. We have now taken a small position in the Dividend Champions Portfolio, with an eye toward increasing our position on price weakness.

A full report on the company will appear in the July issue of Canadian Edge.