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Which Should You Buy: Canadian Natural Resources Ltd. or Canadian National Railway Company?

Despite being in completely different industries, Canadian Natural Resources Ltd. (TSX: CNQ)(NYSE: CNQ) and Canadian National Railway Company (TSX: CNR)(NYSE: CNI) have a lot more in common than one would think.

Besides having similar-sounding names, both have been best-in-class performers in their respective industries. Costs have been kept under control, money has been spent in the right places, and their stock prices have performed very well for a long time.

But which makes for a better investment today? Below, we take a look at each option.

The case for Canadian Natural Resources

To get a sense of CNRL’s success, one only needs to look at the performance of its shares. Over the past 15 years, its shares have earned nearly 17% per year. To put this in perspective, a $10,000 investment 15 years ago in CNRL shares would be worth (with reinvested dividends) over $100,000 today. By comparison, if you had made the same investment in Suncor Energy Inc., you’d have just under $60,000.

The key to CNRL’s success has been ferocious cost control and very smart capital allocation. The company is able to invest money when rivals are pulling back, which makes growing production a lot less expensive. And as seen above, shareholders win in the long run. The company deserves to trade at a premium.

Yet the company is not trading at a premium at all. In fact, it’s trading at a discount to the net present value of its reserves (using a 10% discount rate). So if you’re looking for a good long-term holding and are willing to wait out an oil price slump, CNRL is a great option.

The case for Canadian National Railway

CN Rail has been North America’s most efficient railroad for many years now, and shareholders have been rewarded as a result. Over the past 15 years, its shares have returned nearly 18% per year, even better than CNRL.

Better yet, CN Rail’s future prospects look a lot better than CNRL’s. The growth of crude by rail is creating plenty of growth opportunities, and will allow CN Rail to grow revenues even when oil prices fluctuate. CN also has arguably the best track network of any rail operator — the only one that reaches the East Coast, West Coast, and Gulf Coast. So the company is extremely well positioned.

But there’s one important difference between the two companies: their stock prices. At over 22 times earnings (and, more importantly, over 30 times free cash flow), CN Rail is no bargain. So at this point, CNRL is likely the better option.

There’s another good alternative to CN Rail from the energy sector, and it’s also The Motley Fool Canada’s top pick for 2014. You can read all about it in the free report below.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Benjamin Sinclair has no position in any stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of Canadian National Railway. Canadian National Railway is a recommendation of Stock Advisor Canada.

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