We have a couple of new Bull List additions this week, one to the Growth List and one to the Dividend List. Both are a result of the Brookfield Asset Management spinoff.
Brookfield now has an option for those who want to own the high-yielding portion of its asset management business and those who still want to own the low-yielding roll-up of subsidiaries.
But first, let’s talk about what went on last week because the markets took a large nose dive.
US inflation lower, stocks lower?
To give an idea of how hard it is to time the market, you don’t need to look much further than the movement around lower-than-expected inflation data.
US Inflation came in better than expectations, and we witnessed the slowest pace of growth in nearly a year. As a result, the NASDAQ and the S&P 500 were up nearly 4% and 3%, respectively, on market open.
However, statements made by the Federal Reserve reversed the markets, and they ended up closing out a poor week.
The Fed highlighted that investors should expect more volatility in 2023 and corporate earnings also to take a hit in 2023.
The new rate projections released by the Fed also highlight no rate cuts in 2023, which was not the consensus before this week’s release.
They stated:
“I wouldn’t see us considering rate cuts until the committee is confident that inflation is moving down to 2% in a sustained way,”
This will likely put pressure on stocks to close out 2022 and even in 2023. A “Santa Clause” rally, which occurs in the final 5 trading days of the year and has happened with nearly 75% accuracy since 1950, looks unlikely. But, for long-term holders, a 5-day rally is largely irrelevant.
It is undoubtedly painful to see the constant red in 2022, and the general uncertainty heading into 2023 doesn’t help either.
But if your portfolio is still growing and you’re still making regular contributions to investment accounts, there should be no rush to see stock prices increase.
We’ve added Brookfield Asset Management, and Brookfield Corporation to the Bull Lists
Brookfield has been a Bull List target of ours for a while now. However, the confusion around the spinoff had us opt to wait until it was over and announce both companies to the lists. If this spinoff has you confused, you are not alone. We have tried to make sense of it with these two additions and their reports.
If you read through both of these and are still confused about the spinoff, feel free to drop a question on the Q&A or inside the Discord.
Let’s start with Brookfield Corporation.
Brookfield Corporation (TSE:BN)
Brookfield’s diverse portfolio exposes investors to global assets with a capital base of approximately $125 billion generating $5 billion of free cash flow annually. Brookfield Corp is like a mini-ETF with exposure to a variety of industries through their interests in Brookfield Infrastructure (BIP.UN), Brookfield Renewables (BEP.UN), Brookfield Property, Brookfield Asset Management (BAM), and its 64% stake in Oaktree which gives investors exposure to credit and insurance offerings.
The primary thesis behind an investment in Brookfield today is the company’s ability to acquire assets with relatively little competition and utilize decades of experience to improve the assets and, ultimately, the underlying value. In addition, most of the company’s portfolio is what we call “real” assets. Think of things like pipelines, electrical transmission lines, and real estate, tangible physical assets. During times of high inflation, these real assets have outperformed.
Why such little competition? The company seeks out assets that may need some sort of operational turnaround or further development. Assets that other managers may not want to take on. Acquisitions are often cheaper, and as a result, the company can drive significant growth in AUM (Assets Under Management) and FFO (Funds From Operations).
The selloff in asset managers in 2022 because of the high interest rate environment has left Brookfield trading at attractive valuations. In fact, at the time of the update of this report, the company is trading at a near 30% discount to NAV, and we view it as an excellent opportunity to add this blue-chip company as a core holding.
You can view our full report on Brookfield Corporation here
Brookfield Asset Management (TSE:BAM)
Brookfield underwent a significant event when it spun off its Asset Management business. There was plenty of confusion around the move, but in essence, the old BAM.A became Brookfield Corp (BN), and the spinoff was a new Brookfield Asset Management (BAM) which is now a leading global asset management business.
BAM.A holders received 1 share of BN and 0.25 share of the new BAM for every share of BAM.A held. The new securities officially began trading on December 12, 2022, and BAM.A was delisted.
In the wake of the spinoff, the new Asset Manager is only eligible to receive carried interest on new funds. The expectation is that BAM will not realize carried interest until 2027. The Asset Manager generated $2.021B in fee-related earnings (FRE) and has $2.7B in cash with no debt.
In recent years, BAM has grown FRE at 20%+ across all its business segments. As an asset-light company (it does not own the assets – Brookfield Corp does), it’ll benefit from higher ROE than asset-heavy companies and already has growth locked in through 2024 that is expected to drive 20%+ in earnings growth. The company expects to triple in size over the next five years.
The company is one of the biggest names in the space. It has exposure to some of the fastest-growing segments in the alternative asset management space – which includes infrastructure, clean energy, and credit (through Oaktree).
This growth, combined with an attractive yield and current valuations, makes Brookfield Asset Management one of the best Asset Managers today.
You can view our full report on Brookfield Asset Management here
You are likely sitting here thinking, “what one should I add if I want to buy?”
For the most part, Brookfield Corporation (BN) will continue being the “roll-up” of Brookfield subsidiaries. Or, as many like to call it, a “mini ETF.” It has exposure to the asset management business, renewable energy, utilities, data centers, real estate, re-insurance, and much more.
Brookfield Corporation is very much a total return play. It doesn’t yield much, and the bulk of your returns will come from an appreciation in share price.
On the other hand, Brookfield Asset Management (BAM) gives investors access to one of the highest-yielding Brookfield spinoffs, with special dividends a likely result if cash flows remain strong. You are concentrated on a specific segment of Brookfield, and there is not nearly as much diversity.
It is likely to be the more attractive option for those seeking income. Just understand that much like if you bought Brookfield Renewables (TSE:BEP.UN) you are only getting exposure to the renewable energy end of the business; here, you are only getting exposure to the Asset Management business.
