Smart money backing is considered one of the most reliable indicators that a stock is of high quality. Stocks with high insider ownership have a well-documented tendency to outperform the market, as do stocks owned by high ranking political elites. It’s often alleged that the latter category of “smart money” is involved in unethical trading practices, trading based on inside info. Professional insider ownership, though, is considered both a reliable and legitimate investment, provided the insiders disclose their buys and sales in a timely fashion.
There are few Canadian stocks with more smart money backing than Brookfield Corp (TSX: BN). The stock is owned in heavy concentration by Bruce Flatt, one of Canada’s pre-eminent business leaders, as well as legendary debt investor Howard Marks. Marks has actually been selling stock lately, as he has an enormous concentration in Brookfield stock due to having recently sold his company to Brookfield. Flatt, though, is holding the line, and others like Bill Ackman of Pershing Square Capital have accumulated shares in the last two years.
That Brookfield has connections in high places is undeniable. Prime Minister Mark Carney was once a Vice Chair at the company, heading up its ESG and impact investing strategies. Bruce Flatt brokered the sale of nuclear reactors to Donald Trump and is in the process of forming a $20 billion strategic investment fund with Qatar. Whether the political actors mentioned seem legitimate to you or not, the point is that they show Brookfield’s wide-ranging connections, an indicator of smart money backing.
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What Brookfield’s smart money backers see in it
As a small-time investor, it’s hard to gain an edge in the markets. Sometimes, working in a particular industry will give you an edge in evaluating that industry’s companies. Other times, people with extreme amounts of free time and an inclination to read about economics and business all day can get an edge. Apart from that, “edge” and “small investor” are usually antonymous.
That doesn’t mean that you can’t piggyback off of what the smart money is doing, though. Insider buys tend to be very good bullish signals, signaling future outperformance. Modern securities regulation requires that these buys and sales be disclosed in a timely fashion. So, insider buying is one signal you can use in evaluating individual stocks.
Brookfield’s strengths as a business
Having explored Brookfield’s high level of insider ownership, we can now look at why Brookfield insiders have so much confidence in their company. Is the company profitable? Does it have big investment opportunities? Is it well-positioned with new technologies? Is it cheap?
As it turns out, the answer to all four questions above is a resounding yes!
Brookfield Corp is highly profitable, with a 32% gross margin and a 4.5% free cash flow margin. The FCF margin might not look sky high but this is an asset manager, which usually means a ‘lumpy’ cash flow performance over time.
The company has plenty of investment opportunities, as indicated by the Qatar fund and Brookfield Renewable’s deals with Alphabet and Microsoft.
It is also well-positioned in AI, with Brookfield Infrastructure making big deals in AI data centres.
Finally, Brookfield’s stock is somewhat cheaper than average for the TSX these days, trading at 21 times distributable earnings.
Looking at all these strengths, you can appreciate why Brookfield insiders love their stock so much. Truth be told, I’m somewhat in love with it myself.
