Making the Oracle of Omaha’s list of portfolio holdings is not an easy task. We’ve seen a few Canadian companies crack the list in the past. However, Warren Buffett’s investment criteria are very specific.
Buffett’s track record in railroads speaks for itself
Buffett’s Berkshire Hathaway bought Burlington Northern Santa Fe in the depths of the Great Recession. The Oracle of Omaha made a bet on the strength of the American economy and the recovery he saw as inevitable. This has turned out to be a big win, with railroads since rebounding in an incredible fashion.
I think if we see significant economic volatility on the horizon and railroads are hit again in a big way, Buffett could step in as a buyer. I think CN is the best railroad in Canada. Furthermore, I think this is a stock that has been on Buffett’s radar for some time. Right now, railroads across the board are trading at roughly twice the valuation Buffett paid for Burlington Northern in 2009. That said, if we see valuations drop across the board and a buying opportunity presents itself, I think Buffett could be first in line for a quality railroad like CN.
Warren’s buddies are big believers in CN
Buffett’s buddy Bill Gates happens to be the largest shareholder in CN. That’s right; one of the richest men in the world owns more CN Rail than anyone else. This ownership is through Cascadia Investments, a fund managing Gates’s endowment fund. What’s the investment time horizon of an endowment fund? Essentially, forever. If Bill Gates believes in CN Rail to this extent, it stands to reason that Buffett could be convinced to consider this stock.
I think the takeaway investors need to think about is what price they would be willing to pay to own a company forever. Buffett paid roughly 18 times earnings for Burlington Northern when he made his US$26 billion bet on that railroad. Bill Gates acquired shares in CN at substantially lower prices over the years. These are prudent buyers with the patience and investing time horizon to wait.
Even the best companies like CN Rail can be trading at levels that just don’t meet one’s fundamental criteria. Being patient and waiting for the right time to step in can make all the difference. I think if we do see downside, CN could be a stock Buffett jumps on. That said, I don’t think it will be any time soon, given where valuations are at right now.
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Fool contributor Chris MacDonald has no position in any of the stocks mentioned. David Gardner owns shares of Canadian National Railway. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares) and Canadian National Railway. The Motley Fool recommends Canadian National Railway and recommends the following options: short January 2023 $200 puts on Berkshire Hathaway (B shares), short March 2021 $225 calls on Berkshire Hathaway (B shares), and long January 2023 $200 calls on Berkshire Hathaway (B shares).