Better Buy: Canadian National Railway Stock or Canadian Pacific Railway Stock?

Both CNR and CP are great long-term picks. Here’s why.

| More on:
FREIGHT TRAIN

Image source: Getty Images

Alright, here’s the bottom line up front: I think Canadian National Railway (TSX:CNR) and Canadian Pacific Railway (TSX:CP) are equally good buys and two of the best stocks in Canada. Why? I think its a good idea to play both sides of a duopoly, especially when both companies benefit from the same wide moat.

That’s right; these two giants in the Canadian transportation industry hold a duopolistic position, making them “wide-moat” stocks that have the potential to offer sustained growth and consistent returns owing to a perennial lack of competition. Forget metrics and numbers — here’s the business case.

Understanding wide-moat stocks

A term coined by legendary investor Warren Buffett, “wide moat” in the context of stocks refers to a company that holds a significant competitive advantage over its rivals. Companies possessing a wide moat can generate higher profit margins and ensure stable, long-term growth.

In Canada, the railway industry possesses significant barriers to entry, including regulatory hurdles and the capital-intensive nature of establishing and maintaining a viable railway infrastructure. This scenario has resulted in an oligopolistic structure, dominated by CNR and CP for decades.

This duopoly provides a stable competitive environment, as it is unlikely to see new entrants. Both companies have continued to expand and improve their service offerings and have increased their market share in North America via acquisitions, enhancing their wide-moat status.

The benefits of wide-moat investing

The effects of this wide moat can be seen with both company’s stock prices historically, with CNR and CP outperforming the benchmark S&P/TSX 60 Index over a 21-year trailing period since 2002. The rolling returns show similar results over many intervals, which are less biased to start and end dates.

Here’s another reason to hold both stocks: CP and CNR aren’t perfectly correlated. Right now, the monthly correlation between both stocks is 0.70. They don’t always move in the same direction or magnitude, thus suggesting that by buying both and re-balancing periodically, investors could achieve similar returns while lowering risk.

This point is underscored by looking at each stock’s historical returns on an annual basis. Some years, CP outperforms, while other years, CNR outperforms. However, as seen in the trailing and rolling returns earlier, both stocks have performed similar over the long run.

Thus, smart investors who understand the benefits of diversification can hold both, electing to re-balance periodically to buy the loser while trimming profits in the winner. This strategy helps investors “buy low and sell high,” which is something that many struggle to do consistently.

Long story short: I don’t think either stock is a better buy. Both are vital component of Canada’s railway duopoly. In my opinion, there’s scant benefit to focus solely on one. Buying both is a free lunch from my point of view.

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 Tony Dong has no position in any of the stocks mentioned. The Motley Fool recommends Canadian National Railway and Canadian Pacific Kansas City. The Motley Fool has a disclosure policy.

More on Investing

Hand arranging wood block stacking as step stair with arrow up.
Tech Stocks

3 Canadian Growth Stocks I’d Buy Under $30

These under $30 Canadian growth stocks are well-positioned to capitalize on mega trends such as e-commerce, the electrification of vehicles,…

Read more »

Gas pipelines
Stocks for Beginners

3 Reasons to Buy Enbridge Stock Like There’s No Tomorrow

Enbridge (TSX:ENB) is a superb long-term option. Here's why you should buy Enbridge stock right now and hold it for…

Read more »

money cash dividends
Dividend Stocks

This 8.39% Dividend Stock Can Pay $100 Cash Every Month

Consider investing in this monthly dividend stock at current levels to lock in high-yielding monthly distributions to create a good…

Read more »

Hand arranging wood block stacking as step stair with arrow up.
Tech Stocks

Why This Tech Stock Just Jumped 18%

This tech stock just saw shares surge after announcing it was being acquired, but more growth could still be in…

Read more »

Canadian flag
Investing

3 Top-Performing Canadian Stocks That Should Just Keep Winning

Given their healthy growth prospects and solid underlying businesses, the uptrend in these three top-performing Canadian stocks could continue.

Read more »

The sun sets behind a power source
Investing

3 Reasons to Buy Fortis Stock Like There’s No Tomorrow

As far as top dividend stocks are concerned, Fortis (TSX:FTS) remains a top option long-term investors should consider right now.

Read more »

growing plant shoots on stacked coins
Stocks for Beginners

1 Copper Stock to Buy as Copper Prices Shine

The price of copper continues to climb, and more copper production is on the way for this top stock up…

Read more »

TFSA (Tax free savings account) acronym on wooden cubes on the background of stacks of coins
Dividend Stocks

Here’s the Average TFSA Balance in 2024

The Bank of Montreal (TSX:BMO) says that the average TFSA balance is $41,510, far below the maximum.

Read more »