Stock Stories, Vol. 2: You Wouldn't Think a Railroad Could Be This Unpredictable

In the common parlance of Wall Street, a "story stock" is one for which the numbers may not have arrived yet, but the narrative has, and it's compelling enough to make investors buy essentially on spec. But from the perspective of Motley Fool co-founder David Gardner, every addition a Foolish investor makes to their portfolio has a story behind it, and on this episode of Rule Breaker Investing, he invites several of our analysts into the studio to share some of their favorites.

In this segment, Brendan Mathews -- a member of the Stock Advisor research team, and the portfolio lead for Odyssey 2 and Supernova -- talks about the lessons one can learn from the tale of Canadian National (CNI 0.36%), a Stock Advisor recommendation since 2008. One might expect a railroad company to be a steady, predictable performer, but its stock chart looks more like a roller coaster over that period. (And, as a bonus, they also chat a bit about the story of salesforce.com (CRM 0.42%), so stick around to the end.)

A full transcript follows the video.

This video was recorded on June 6, 2018.

David Gardner: Now, it's time for stock story No. 3. I get to welcome back my friend, Brendan Mathews. Brendan, how are you doing?

Brendan Mathews: Great!

Gardner: Awesome! Now, I know the company you're talking about. You and I talked about it ahead of time. I'm not sure what the story's going to be, but it's Canadian National, the railroad company. CNI is the ticker symbol.

Before you start with it, though, Brendan, how long have you been at The Fool, and what do you do here?

Mathews: I've been at The Fool six years now. I'm part of the Stock Advisor research team, and I'm the portfolio lead for Odyssey 2 and Supernova.

Gardner: Awesome. Remind me, Brendan, is Canadian National in Odyssey 2, in our portfolio?

Mathews: It is not. I don't believe any of the Supernova portfolio services have picked it up. It's hard to get excited about a railroad, sometimes.

Gardner: [laughs] You say that, and yet, you're going to make it exciting in stock story No. 3, or at least interesting. Brendan, take it away!

Mathews: Once upon a time, commodities were in a historic boom. Housing was booming, too. People were using all kinds of forestry products to build homes, and there was an outstanding railroad that connected the Pacific and British Columbia to the Atlantic and Nova Scotia, and then the Great Lakes and the Gulf of Mexico.

This time, if you might have guessed, it was 2008. That's when you recommended Canadian National to Stock Advisor members. The shares, on a split-adjusted basis, were $28. The CEO was Hunter Harrison, who has recently passed away after being the CEO of CSX and Canadian Pacific. He was a legend in the railroading industry. He was Morningstar's 2013 CEO of the Year.

So, $28 a share, March of 2008. I think we all know what happens in the fall of that year. Bear Stearns is the first to fall. We see the housing market come apart. Stock market hits historic lows in March of 2009. Canadian National is not immune. Its shares fall to $16. And along with the stock market, the housing market and the commodities market both completely fall apart, and they've really not recovered to a huge degree.

Canadian National, shares fall to $16. But earnings actually didn't fall that much. They had $2.1 billion in profits prior to the Great Recession. Profits fell to $1.9 billion, stayed that low until recovering in 2010. Since then, shares have chugged along from $16 lows to $82 today. Now, there were highs and lows along that way. In 2014, shares hit $71 before falling to $59 in the beginning of 2016.

Basically, this is a company where a lot of interesting and unpredictable things have happened. Hunter Harrison, the CEO I was talking about, left in 2009, shortly after we recommended the shares. The company completed a big acquisition of Elgin, Joliet and Eastern Railway around Chicago, so, they made an important acquisition. Their forestry business, shipping a lot of lumber to supply houses, that portion of their business kind of fell apart. As we've seen in a lot of other railroads, coal shipments have fallen off.

But, all along the way, forgive the pun, they just were kind of chugging along, from $28 to $82 a share. And along that time, they paid $8 in dividends.

Gardner: Ah, I'd forgotten that!

Mathews: That's a four-bagger return. 316% vs. 157% for the S&P. Really outstanding returns for a company that's not super exciting, and a lot of tumultuous and unpredictable things happened over the course of a decade.

Gardner: Brendan, the lesson may be self-evident, but can you double underline the lesson of this story as you see it?

Mathews: For me, the big lesson is, you can't predict everything. But if you can get the big things right, you'll do well. I think, with this stock, the one thing that we got right when I look back at your original recommendation was the quality of Canadian National's network. They have that three-coast rail network that really nobody else has in the North American continent, and they're just a great railroad. You can't predict commodities booming and busting, housing, CEOs coming and going. But, you've really got the right railroad with the right assets, you get that right, and it worked out.

Gardner: It's really wonderful to hear you remind me and us what's happened over the last ten years -- yep, that's how long we've been holding Canadian Natty. From my standpoint, your analysis itself felt like the longer-term, bigger landscape of railroad companies themselves, talking about a big acquisition, talking about the CEO leaving within a year of our recommendation. Something delightful for us as long-term thinkers and actors, to be able to step away and see a business like this. I think what's especially cool, Brendan, is that this is railroads! The business itself has been around for a couple of centuries now. That's pretty cool on its own.

Mathews: Yeah, its history goes back to 1832, almost 200 years.

Gardner: Tremendous. Before I let you go, how about, talk about a recent Odyssey 2 purchase, one that you and your team like, just a little extra candy for our listeners as you depart?

Mathews: The newest stock that we've added to our portfolio is Salesforce. They're the original top dog in SaaS software. They offer customer relationship management software and a couple of other things. Really just had a great quarter. If it's possible to say a company is selling for a cheap multiple at over 8X sales, then that's the case here with Salesforce.

Gardner: [laughs] Probably one of the best performers that's the least acknowledged or talked about. Marc Benioff, the founder CEO, is a guy who is definitely one of the great CEOs of our time, but a name we haven't mentioned as often on the show.

One funny stat I was looking at, Brendan, you know that we've counted spiffy pops for all of our stocks -- when a stock makes more in a single day than our cost basis. For Salesforce, which has been thanks to Tim Beyers, who brought it into Rule Breakers about a decade ago, Salesforce is up 18X in value, but has only -- and this sounds crazy to me -- has only spiffy popped three times. Now, when your stock goes up 18X in value, and only on three occasions has it had enough volatility to jump over the cost basis you once paid, that's very unusual. I was looking back, the last couple of years, it hasn't made more than about a 4% move either way, and that's through a pretty strong and sometimes volatile stock market. It's a great company.

Mathews: Yeah, that's true. It's the amazing thing about Salesforce. They have this great backlog of business. They have future revenue in the bag. Unlike other high flyers, you don't necessarily see those big drops when they miss earnings by a couple of pennies.

Gardner: Mm, excellent point.