Are you looking for stocks that are currently out-of-favour but could turn around to become “all stars” in the coming years?
If so, there are many opportunities for you to look into in today’s market. Technology stocks have gotten very expensive, but in just about every other sector, opportunities abound. Banks are down for the count. Oil stocks have moved only a little despite a very large move in oil prices. Foreign stocks, in general, remain much cheaper than North American stocks. The opportunities, alongside high yields, are out there if you know where to look. In this article, I will look at two out-of-favour stocks that could be all-stars in the making.
Brookfield Corp (TSX:BN) is a TSX stock that I recently bought after a prolonged period of being on the fence about it. I’ve known about Brookfield since 2018, and I’ve been reading about it this entire time, but it’s not until recently that I felt I understood it well enough to actually buy it. The fact that I was able to buy it on a significant dip certainly helped matters.
Brookfield is a tricky company to wrap your head around. It is a holding company. Beneath the corporate level, you have wholly owned real estate and insurance businesses, as well as a 75% stake in an asset management firm (more on that later). Another level down from that, you have ownership interests in various Brookfield “partnerships” and funds. There are dozens of Brookfield entities out there, and sometimes it’s hard to tell one from the other.
Basically, what you need to know is that Brookfield owns a real estate business and an insurance business, collects fees from its asset manager, and also has money invested in its own funds. It seems confusing at first but once you know that there are basically four “moving pieces” you need to keep track of, it gets a little easier.
Brookfield stock is very cheap right now, trading at 0.6 times sales, 12.6 times distributable earnings, and 1.1 times book value. The stock got beaten down for a number of reasons, including some real estate defaults and a large decline in first-quarter net income. However, the company’s cash flows and distributable earnings are still growing. There are risks here – the company is highly indebted in a time of rising interest rates – but there is real opportunity as well.
Brookfield Asset Management
Brookfield Asset Management (TSX:BAM) is Brookfield’s “asset manager,” mentioned in the previous section. It is a company that runs funds for clients and collects management fees. It’s an asset light business model that incurs almost no debt: BAM’s debt-to-equity ratio is a miniscule 0.05. The company’s margins are also sky high, with a 73% gross margin and a 53% net margin. “Gross margin” and “net margin” are different profitability metrics: both of these ratios for Brookfield Asset Management are among the highest you’ll find among listed Canadian companies. This suggests that the company is highly profitable. The downside is that BAM is much more expensive than its parent company, trading at 6.8 times sales. With that said, such a high-quality business probably deserves some kind of a premium. At any rate, I’m comfortable having a sizable percentage of my money invested in it.