One of the things I’m always on the lookout for as a long-term investor is a wide-moat business that normally trades at a premium but, for one reason or another, is priced more reasonably.
I’m not talking about screaming “undervalued” opportunities. Truly great businesses are rarely cheap. But when you can buy them at a valuation that makes sense relative to their cash flows, balance sheets, and long-term earning power, that’s usually worth paying attention to. On the TSX, there are really only two companies that fit this description for me right now: Canada’s two railways.
Both stocks have struggled, sentiment is lukewarm, and yet the fundamentals remain largely intact. Here’s why I think Canadian railway stocks could be a solid long-term bet heading into 2026.
Canadian National Railway
Canadian National Railway (TSX:CNR) hasn’t been an exciting stock recently. Year to date, the shares are down 8.8% on a price basis, not accounting for dividends, and performance over the past five years has been underwhelming compared to the broader market.
But when you look under the hood, very little appears broken. Operating and profit margins remain firmly in the double digits. Return on equity sits around 22%, which tells you management is still deploying capital efficiently. On a trailing 12-month basis, levered free cash flow is roughly $2.9 billion. This business continues to generate an enormous amount of cash.
Freight is still moving across the country. Tariffs and macro noise may impact volumes at the margin, but no one is building another coast-to-coast railway in Canada. The barriers to entry here are massive: land access, regulation, capital intensity, and decades of infrastructure build-out. In 2026, those barriers are even more insurmountable than they were in the past.
From a valuation standpoint, the stock now trades at 16.37 times forward earnings. If you flip that number around, you get an earnings yield of 6.1%. I like to compare that to the Government of Canada 10-year bond yield, which is currently around 3.4%. As a long-term investor willing to hold for 10 years or more, you’re being compensated with an earnings yield meaningfully above risk-free government bonds.
If you were happy buying this stock five years ago at a higher multiple, it’s worth asking yourself why you’d avoid it today when the underlying business hasn’t materially changed. The rails didn’t disappear, and neither did the moat.
Canadian Pacific Kansas City
Canadian Pacific Kansas City (TSX:CP) is the natural companion to CNR. The business shares many of the same characteristics: double-digit margins, strong returns on equity, and robust free cash flow generation.
The main difference today is that CP is still digesting its acquisition of Kansas City Southern. That integration has created some noise and uncertainty, but strategically it also gives CP something unique: a rail network that connects Canada, the U.S., and Mexico. That North American footprint is a long-term asset, even if it makes the company more sensitive to trade headlines and tariff fears in the near term.
Valuation is starting to look more reasonable here as well. CP trades at about 19 times forward earnings, which works out to an earnings yield of roughly 5.3%. Compared to the 10-year Government of Canada bond yield of about 3.4%, that’s still a meaningful premium for owning a dominant, irreplaceable infrastructure asset.
The stock has been hit harder by fears around trade and integration risk, which is precisely why it’s starting to get interesting. If you’re a stock picker with a long time horizon, buying into that fear can make sense when the core economics of the business remain strong.
