Do you want to find and invest in high-quality stocks before the crowd jumps on them?
If so, it pays to look at quality stocks that have been temporarily beaten down.
When you get a company that displays a wide moat, high margins and high returns on invested capital, yet is down 10%-20% in the market, you jump. The returns after that point are likely to be high.
In this article, I’ll explore one quality stock down 13.5% year to date that might be just the opportunity you’re looking for.
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Brookfield
Brookfield Corp (TSX: BN) is a diversified financial conglomerate that invests in alternative assets, among other things. Its stock pays a dividend with a 0.72% yield. The yield might not seem like much, but the payout has been growing in recent years. It could become something more substantial in the future.
Brookfield is widely regarded as a top-quality financial institution with very good assets. Despite this, its stock is down 13.5% year to date, most likely because it is seen as a private equity/private credit play, a space that is struggling this year.
The private equity/private credit drama merits an article of its own, as it is too complex to fully explain here. Suffice it to say, investors are worried about private credit loans to software companies, which are seen as vulnerable to AI-caused obsolescence. Software borrowers do appear to be defaulting at higher rates this year, though the trend is fairly weak and not commensurate with the pounding that private credit funds have seen in the markets. Regardless, Brookfield is today the 100% owner of Oaktree Capital, a company that runs some of the best-received private credit funds in the world. The perception of risk brought on by this association is the likely culprit behind Brookfield stock selling off this year.
Why you shouldn’t worry about the selloff
The main reason you shouldn’t worry about the selloff in Brookfield stock this year is that the company does not actually own any software loans directly. It is involved exclusively through Oaktree’s funds, which do not create balance sheet exposure or solvency risk for Brookfield.
A second reason you shouldn’t worry is that the private credit fears are probably overblown anyway. This isn’t 2008; private credit is a much smaller market than mortgages were that year, and it isn’t strongly connected to systematically important parts of the economy. Plus, the narrative about AI “threatening” software companies is exaggerated. Vibe coding does not give you network effects, a developer community, or the ability to speak with human technical support. All of this comes 100% from the human. So, software is probably safe now, and for a while to come.
What’s to like about Brookfield
Having debunked some of the apparent “risks” facing Brookfield today, it’s time to move on to what’s to like about the company.
There’s a lot!
First, it trades at a steep discount to its sum-of-the-parts valuation. This discount has only increased with this year’s correction.
Second, it owns some of the best assets in the world, including several prestigious trophy properties and (indirectly) the storied nuclear company Westinghouse.
Third and finally, the company is run and operated by ambitious, talented people who want to win. That, combined with the other advantages mentioned above, provides hope that Brookfield’s future will be better than its recent past.
Foolish takeaway
When you see a high-quality stock crashing hard, you buy. It’s such gutsy trades with high-quality names that fortunes are built on. Today, with Brookfield down 13.5% despite putting out good earnings, it appears we have such an opportunity right under our noses.
