Bombardier (TSX:BBD.B) stock isn’t a winner. Right now, shares trade under $1. In 2011, shares were above $7.
But this isn’t a short-term phenomenon. In fact, Bombardier has been a losing investment for decades.
The biggest problem is that the company is in a cash-intensive business. It builds expensive things, meaning planes and trains.
Building expensive things is risky, because profit margins are often slim. If costs come in above expectations, years of profits can evaporate. That’s exactly what’s happened time and time again to Bombardier.
This company has a long history of missteps, but there’s a similar company that hasn’t made so many mistakes. The stock below has benefited from Bombardier’s end markets while delivering double-digit annual gains for more than 40 years.
This is the stock
Don’t laugh, but Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B) is the perfect substitute for Bombardier stock.
Most people know of Berkshire thanks to its famous founder, Warren Buffett. What many don’t know, however, is that Berkshire made a fortune by betting on companies that directly compete with cash-intensive industrial stocks like Bombardier.
The clearest case is when Berkshire bought Precision Cast Parts in 2016 in an all-cash deal of $235 per share, totaling $37 billion. At the time, it was one of the biggest acquisitions in its history.
“I’ve admired PCC’s operation for a long time,” Buffett said at the time. “For good reasons, it is the supplier of choice for the world’s aerospace industry, one of the largest sources of American exports.”
This is a cash-intensive business making expensive things, but unlike Bombardier, it’s been able to generate healthy long-term profits. Part of that has to do with end markets, but the rest is due to superior management.
This isn’t the only case where Berkshire waded into Bombardier’s market. In 2009, it acquired Burlington Northern Santa Fe for $44 billion. A few years after that, Buffett started acquiring airline stocks.
Ditch Bombardier stock now
Berkshire’s performance easily trounces Bombardier’s, even though they’re involved in similar industries. The difference is strategy.
Time and time again, Bombardier has taken on too much debt and focused on dying, high-risk opportunities. Berkshire, meanwhile, built an enviable portfolio of assets capable of performing well over the next decade and beyond.
Of course, you get a lot more with Berkshire stock. The holding companies owns hundreds of different assets, from Coca-Cola stock to privately owned aircraft services. But with Buffett running the show, you can rest assured that these assets will perform as well as the segments more similar to Bombardier.
In fact, Berkshire’s diversification is exactly the reason why it’s superior. When times are good, its cash-intensive businesses generate a great profit. When conditions worsen, or a single bad deal hits, the company can lean on its other segments to keep everything afloat.
As an industrials pure play, Bombardier is skating on thin ice right now. Its main money maker is manufacturing planes. The COVID-19 situation may finally push the business into bankruptcy.
Meanwhile, Berkshire has experienced very little impact. Ditch perennial losers like Bombardier for proven winners like Berkshire.
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.
The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and recommends the following options: short September 2020 $200 calls on Berkshire Hathaway (B shares), long January 2021 $200 calls on Berkshire Hathaway (B shares), and short January 2021 $200 puts on Berkshire Hathaway (B shares). Fool contributor Ryan Vanzo has no position in any stocks mentioned.