Railroads are about the furthest thing from an emerging industry, having experienced a boom in the 1850s, but their importance to society has held up well through the years. And after more than a century in business, the survivors of the industry can make intriguing additions to your portfolio.
During this appearance on Motley Fool Live, recorded on Feb. 11, Motley Fool Co-Chairman and Chief Rule Breaker David Gardner joined Industry Focus host Nick Sciple to discuss why he has a special interest in railroads, and the two discuss why one railroad in particular is set up to outperform in the years to come.
David Gardner owns shares of Canadian National Railway. Nick Sciple has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Canadian National Railway. The Motley Fool has a disclosure policy.
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Nick Sciple: The first one I wanted to talk about is railroads. We talked about earlier the importance of an important emerging industry. You couldn’t think of an industry that has less emerging than railroads. The 1850s was the railroad bubble. Why does this industry fit into your universe of stocks that you’re interested in?
David Gardner: Well, first of all, Nick, I want to thank you for looking over all of the different industrials and energy picks I made, and actually grouping them up into a few themes. These are actually your themes that you’ve come up with. But I certainly agree with them. You put an extra due diligence that I’m not putting in because I’m not thinking about trends or sectors. I never really have cared about sectors as an investor. I’m just really thinking about the companies, like the company itself that we’re looking at. I want to be a part owner of that company, not that other one. But then they start to group up and then some themes and you’ve identified those. The first one, railroads. Yeah, I love railroads. I personally have always enjoyed riding on a train. I remember being a little kid with overnight trains up from Washington DC where we grew up to the Northeast, the Vermonter. I loved board games. A lot of board games have trains among their themes. Simple games like Ticket to Ride are much more complicated games. I’ve just always been a railroad fan, but I think the reason that this has been a great place to invest is because it is timeless. It’s like beer. Railroads have not been along around nearly as long as beer, but at this point in time, it’s one of those things you can picture staying in place for the rest of our civilization. I really like those timeless businesses. Certainly, a few of them, we can talk about one or two of these companies. But I just really like their positioning. I’ll also mention, these tend to be oligopolies so you’ve got just a few big players, and so you can own the whole industry with a few stock picks. I just think it’s a great industry to be invested in. It’s still such a cheap way to move stuff from point A to point B relative to many other ways to do it these days.
Sciple: Yeah, the other thing to think about it is energy efficiency. A lot of people were talking about emissions and those things. When you talked about it, just the sheer magnitude of goods that you can ship on the railroad and the energy efficiency you can get, you’re not going to find a replacement anytime soon. Not to mention, I don’t think anybody’s going to be putting it in any new railroad track anytime soon, at least not only the incredible scale that we’ve had built all over the country. We have a hundred years of building this stuff, a hundred plus years of putting this infrastructure in place.
Gardner: It’s a great point, unless Elon starts digging underground and creates all crazy stuff. But we’ll be invested in that too. I really like your point though, Nick, that this is a timeless business. Those tracks have been laid and boy, do we, as a society, every day, benefit from the energy efficiency and the cheapness of transportation that this amazing network has built out, not just for our country but around the world.
Sciple: Yes, so maybe we’ll talk about one of those companies. Canadian National Railway (NYSE: CNI) is on your scorecard, was first recommended in Stock Advisor, March 2008. I think it’s an interesting time because you think about 2008, the economy at very low point, railroads can tend to be exposed to what’s going on in the economy. They’re basically what where trade is done and so they’re exposed to trade. Why did this jump out to you as an opportunity for you back at that time where there was a lot of volatility in the market?
Gardner: Well, I’m pretty sure, this is now just about 13 years ago so I have to admit, I don’t exactly remember where my mind was. I will say it was March 2008, things we’re starting to go down. We were not anywhere near like the nadir of the Great Recession of 2008-09, it was early days there. But a lot of times, I’m just casting around for what’s that company that I’d want to recommend. I don’t think I was trying to time in advance of a big drop-off or anything. I was thinking again about what I said earlier, what makes sense, what is timeless and what is good for the world. There’s probably something else to be said just about just the ubiquitous branding. I see the CN railroad cars, Canadian National here across North America. I’ve looked at the financials, that’s always really important. I don’t exactly remember when I saw 13 years ago. I’m just really happy to think about this, and Nick, this is thanks to the work you’ve done, but I’m seeing the stocks up about 462 percent. Since then, the market’s up 286%. Isn’t that wonderful that we’re up about 175 percentage points on the market averages. If you just bought the S&P 500, you’d be well down to buying and owning Canadian Natural, also pays a dividend and love it for the next 13 years.