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What stocks would you own if you could only own three?
It’s an interesting question, because it forces you to think very hard about which of your stocks you truly value the most.
Although most investors (including me) own a lot more than three stocks, many people like to hold certain stocks at much heavier weightings than others. Sometimes, we have good reasons for doing this, but often, it’s just a matter of how the chips fell. To justify holding three stocks at an outsized portfolio weighting, you should be able to explain why you’d hold just those three stocks if you had to. With that in mind, here are the stocks I would own if I could own just three.
Canadian National Railway (TSX:CNR) is a Canadian rail transportation company. It transports $250 billion worth of goods across North America each year. It’s the only North American railroad whose tracks touch three coasts, which gives it an advantage in shipping goods to certain locations.
One big advantage that CNR has is a strong competitive position. It has only one competitor in Canada and only a handful of them in the United States. This gives the company pricing power, which can be seen in its profit margin (about 30%).
CN Railway stock has been dipping this year. Its most recent earnings release missed analyst expectations and delivered negative growth in revenue and profit. It was a minor setback, but it’s important to know that rail transportation is very cyclical, ebbing and flowing with the economy. So, the fact that CNR had a bad showing last quarter doesn’t indicate a long-term trend.
One very appealing thing about CNR stock is its dividend-growth track record. The yield today is only 2.13%, but the dividend has increased by about 11.9% per year over the last five years. If the company can keep up that growth track record, then investors will end up with a fat yield on cost in the future.
Alphabet (NASDAQ:GOOG), otherwise known as “Google,” is a U.S. tech company that operates Google Search, YouTube, Google Drive, Gmail, and Google Cloud. If you think that’s an incredible number of giant services for one company, you’re right: Google has seven services with over a billion users each. The company’s services as a whole have 4.2 billion users — more than half the world’s population.
Like CN Railway, Google has a very strong competitive position. Its search engine has a 90% market share worldwide, and YouTube is the leader in social video content. The company’s most recent earnings release beat expectations, delivering the following metrics:
- $74.6 billion in revenue, up 7%
- $18.4 billion in net income, up 14.7%
- $21.84 billion in operating income, up 12%
- $1.44 in diluted earnings per share (EPS), up 19%
- $28.6 billion in cash from operations, up 47%
Overall, it was a strong showing, and Alphabet has enough structural advantages to make more strong showings likely in the future.
Berkshire Hathaway (NYSE:BRK.B) is a financial holding company controlled by Warren Buffett. It owns a number of high-quality businesses, including Geico, BNSF Railway, General Reinsurance and Nebraska Furniture Mart.
This stock is, more than anything else, a bet on management skills. Warren Buffett is often thought of as the best investor of all time. His lieutenants — Ted Weschler and Todd Combs — also have very distinguished track records. For example, Ted managed to run his Roth IRA up to a $260 million balance, implying about a 30% annualized return given the contribution limits. Berkshire has a lot of smart people running its operations and managing its investments, so it’s fairly likely to perform well.