Railroad Stock to Own for 10+ Years the Next in Series of Core Holdings?

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One of the bigger problems I find when identifying and highlighting great stocks is the fact that the most desirable investments have already been bid up tremendously by institutional investors. It is not an easy time to be a buyer of equities in this market, with valuations elevated and share prices at or near their highs.

But a professional investor or fund manager is constantly buying and selling stocks, because that’s what they’re paid to do. Clients don’t pay fees to have money sit in cash; they pay for performance.

One of the largest private equity investors is Bill Gates. His private investment firm, Cascade Investment LLC, holds a vast array of stocks, and he also has significant holdings in the Bill and Melinda Gates Foundation Trust.

One of the top holdings in both these entities is Berkshire Hathaway, Inc. (BRK). The other is Canadian National Railway Company (CNI), of which Bill Gates is the largest individual shareholder.

Just as in the healthcare sector, exposure to the transportation sector is a must in any equity market portfolio. I like Canadian National and Union Pacific Corporation (UNP), but I would likely lean toward Canadian National, if I had to favor just one. Among the group of railroad stocks, this company has outperformed them all over the last 15 years. (See “Winning Railroad Stock a Buying Opportunity?”)

The company’s rail transportation system is unique in that it crosses all of Canada, from the east coast to the west coast, but it also heads straight down through the heart of America to the Gulf Coast. It is a unique infrastructure, with extraordinary economies of scale. Canadian National’s long-term stock chart is featured below:

Chart courtesy of www.StockCharts.com

The company’s third quarter of 2013 was another success. Management said that revenues increased eight percent to a record CAD$2.7 billion, based on a four-percent gain in revenue ton-miles and a three-percent gain in carloadings.

Quarterly earnings came to CAD$705 million, or CAD$1.67 per diluted share, compared to CAD$664 million, or CAD$1.52 per diluted share.

Of note were the significantly higher freight volumes from the energy sector along with market share gains, which management cited as reasons for the increase in sales. Third-quarter revenues for petroleum and chemicals grew 17% over the same quarter last year.

Investment risk with railroads stocks has to do with two principal factors: the first is the general trend in the North American economy, and the second is the degree to which investors want to be involved in the sector. Because it is old economy, it can fall out of favor with investors who may want to rotate into growth stocks.

Regardless, railroads are the backbone of the North American economy and are a worthwhile component of a long-term equity market portfolio. Canadian National is my second highlighted position that is a worthwhile addition to a long-term investor’s wish list as a core holding in any stock market portfolio. (See “My First Pick in a Series of Core Investment Portfolio Holdings” for the first core holding I profiled.)

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