The Ultimate “Warren Buffett” Pick on the TSX

Warren Buffett may be the most renowned figure in the world of investing. Between his profitable contrarian investments, accurate market forecasts, and $84 billion fortune, “the Oracle of Omaha” has a track record that speaks for itself.

Buffett is mainly known for investing in his native country, the United States. But in recent years, he has been casting his net abroad with greater frequency. Last year, he made waves by investing in Home Capital Group with a $1.5 billion loan and a $300 million equity stake.

For TSX investors looking to piggyback off of Buffett directly, Home Capital would be one pick to consider. But for my money, there’s an even better “Warren Buffett-style” play on the TSX.

Canadian National Railway  (TSX:CNR)(NYSE:CNI)

CN Railway is one of Canada’s oldest and most prestigious companies. It’s a railway operator whose lines stretch from B.C. to New Orleans. It’s the namesake of Toronto’s CN Tower, and a favourite investment of Warren Buffett’s friend Bill Gates.

What makes CN Railway a “Warren Buffett-inspired” play?

Aside from the superficial resemblance to Buffett’s own 2009 Burlington Northern Santa Fe Railroad investment, there are tonnes of things that make this stock Buffett-worthy. We can start by looking at growth.

Phenomenal growth

You might not think of a railroad operator as a high-growth stock. And for those seeking truly dizzying returns, CN Railway will probably disappoint. However, the company has some pretty solid growth metrics. It posted 18% year-over-year earnings growth in its most recent quarter. This is partially due to a weak showing a year earlier, but revenue is growing consistently at about 9% year over year. Analysts who cover CN Railway expect it to grow earnings at 9% annually for the next five years.

Reasonable valuation

CN Railway stock has a pretty modest valuation by some metrics. Its P/E ratio for the trailing 12-month period is 14.87, which is low compared to other top TSX stocks. The company’s PEG ratio, a measure of price, earnings, and analyst-estimated growth, sits at 1.86, which is about average. The company also has a return on equity of about 34%, a figure that Warren Buffett would salivate over.

Dividend income

Last but not least, we get to the topic of dividends. Although Warren Buffett has never issued a dividend for Berkshire Hathaway shares, he has been known to invest in dividend stocks. CN Railway pays a dividend that yields about 1.63%, which is not overly high, but has been growing: between 2013 and 2018, it was raised by more than 10% annually. Should this trend continue, that 1.63% yield could grow to 3% or more in short order.

Bottom line

CN Railway shares have had a solid run over the past five years, doubling in price while paying (and raising) dividends all along the way. The stock’s growth is backed by solid growth in the underlying business — and despite this, it’s still priced low relative to earnings. It’s not a surprise that Bill Gates — who has Buffett on speed dial — invested in this stock. It’s a true value play in every sense of the word.

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Fool contributor Andrew Button has no position in any of the 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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