Canadian National Railway (TSX:CNR) was the first stock I ever bought, not including a portfolio I bought late in my high school years then sold to pay for university. In other words, it was the first stock I bought as part of the portfolio that I own currently and have been building up over the years for the purpose of long-term saving.
I bought CNR in early 2019, during the recovery from the 2018 market correction, for $114. Then, during the 2020 COVID-19 market crash, I bought another lot at $100. In 2021, I sold all of my CN Railway shares to buy Berkshire Hathaway stock, which I still hold today.
My decision to move money from CNR stock to Berkshire ended up being a good one, because CN Railway has declined from the price at which I sold it, while Berkshire has risen considerably from the price at which I bought it. Overall, the “in and out of CNR to buy BRK.B” trade has been a very profitable one for me.
Although I no longer own CN Railway stock, I look back on my days owning it with fondness, as it was the stock that started me on the process of building my current portfolio, which has worked out well for me over the years. In this article I’ll review why I bought CN Railway stock, how it all worked out, and the lessons I learned from the experience.
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Strong competitive position
The main reason why I bought CN Railway stock was because of its strong competitive position. The company is one of only two major freight railways in Canada, and the biggest by revenue ton miles. CN Railway’s main business activity is transporting vital freight — such as oil, timber and farm produce — across the country. It transports $250 billion worth of goods every year. Rail is the most affordable way to ship goods by land (except oil when sent by pipeline). Owning to its strong position in an essential industry, CN Railway has the ability to make very good money.
Ultra-high margins
Consistent with its strong competitive position, CN Railway has high profit margins. In the trailing 12-month period, it boasted the following:
- A 55% gross profit margin
- A 40% operating income margin
- A 26% net margin
- A 13% free cash flow margin
- A 22% return on equity
- A 10% return on capital
All of these metrics indicate that CN Railway is a highly profitable, thriving enterprise.
Decent growth (at the time)
Along with high profit margins, CN Railway also boasted high growth during the period when I owned it. In that period, it was growing its revenue and earnings at about 10% year over year. Since then, CNR’s growth has slowed down quite a bit, which is one of the reason why the stock price has declined.
How do I view CN Railway today?
These days, I’m slightly less bullish on CN Railway than I was in the days when I owned it. The company isn’t growing much these days — that’s a downer. However, CN Railway is still profitable, which means it’s a buy at some price. However, I’d probably want a lower price before taking a position today than I wanted in the past. Overall, I’m glad that I sold CNR and traded my shares in for BRK.B.
