Are you looking for a stock to buy and hold for 20 years?
Generally, they’re pretty hard to find. Whole indexes (i.e., index funds) are usually safe to hold for several decades because they “diversify away” so much risk that they are unlikely to deliver lifetime negative returns. It’s a different story with individual stocks. Individual stocks face both company-specific risk and market risk. For this reason, you need to do much more research to make informed investments in them. To be truly sure that an individual company will thrive for 20 years, you would need to become one of the world’s foremost experts on that company.
On the flip side, individual stocks also have company-specific sources of return, so with diligent study and some luck, you can outperform the market with well-researched individual stock picks. In this article, I will explore one TSX stock that I plan on holding for 20 years, along with the reason I’m confident in making it a long-term hold.
Brookfield
Brookfield (TSX:BN) is a Canadian asset manager. It’s in the business of managing capital for clients. It also invests some of its own money into the deals that its funds invest in. It is involved in the following industries:
- Fund management
- Insurance
- Private credit
When you compare Brookfield’s shares to what the company actually owns, the stock appears to be undervalued. Brookfield owns stakes in various partnerships (e.g., Brookfield Infrastructure Partners (TSX:BIP)) as well as Brookfield Asset Management (TSX:BAM). If you add up the net asset values of all the partnerships as well as the market value of Brookfield Asset Management shares, you wind up with BN trading for less than the value of its assets, net of debt. This is a point that Brookfield itself has made in presentations, several shareholders have done the math themselves and found that Brookfield is in fact trading at a significant discount to its net asset value (NAV). As far as the conventional valuation ratios go, Brookfield trades at
- 17.19 times forward earnings (i.e., the best estimate of next year’s earnings);
- 0.66 times sales;
- 1.58 times book value; and
- Eight times operating cash flow.
On the whole, the stock looks pretty cheap. All of these ratios are below average, and the book value ratio goes even lower if you use NAV in place of accounting book value.
Why it’s so cheap
When you notice that a stock is cheap, the first question you have to ask yourself is whether it’s cheap for a reason. Investors aren’t stupid; in many cases, when they avoid a stock, it’s for good reason.
In Brookfield’s case, the main reason the stock has gotten so risky is because interest rates have gone up. Brookfield has an enormous amount of debt and a 5.5 debt-to-common equity ratio. As interest rates rose in 2022 and 2023, Brookfield’s stock price fell because people thought that the company’s earnings would go down. Indeed, its GAAP (generally accepted accounting principles) earnings did go down. So, Brookfield is subject to interest rate risk right now. I wouldn’t say it is so exposed to it that it’s at risk of collapsing. But it’s riskier than your usual TSX stock.
Nevertheless, Brookfield is a very strong company. It has a highly profitable asset manager, a fast-growing insurance company, a private equity business, and several listed partnerships. Provided the company manages interest rate risk well, it should do well for the foreseeable future. Personally, I’m content to hold it for 20 years.
