This Canadian Stock is Down 27% and I’ll Still Hold it for Decades

Brookfield Asset Management (TSX:BAM) is down in the markets, but its fundamentals are improving.

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Key Points
  • Brookfield Asset Management stock is down X%. I bought some when it was at its lowest point of the year, and am now up slightly, but I'd gladly keep holding were it to decline in price below my average cost.
  • The company has an asset light business model and very high profit margins.
  • It also has billions in committed capital and a quality management team.

Very often, the stocks that get beaten down the most prove to be the best investments long term. Obviously, this isn’t always the case; sometimes cheap is cheap for a reason. Nevertheless, markets are prone to emotional overreactions, and when a quality company goes on sale, you buy. In this article, I will explore one Canadian stock down 27% that I bought at its lowest point of the year, and would buy more of were it to decline in price further.

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Source: Getty Images

Brookfield Asset Management

Brookfield Asset Management (TSX: BAM) is a Canadian asset management company. It is a partially owned subsidiary of Brookfield Corporation (TSX: BN), a diversified Canadian conglomerate involved in insurance, asset management, renewable energy, infrastructure, and real estate. BAM is perhaps Brookfield Corp’s most lucrative business, with over a trillion dollars worth of assets under management and billions of dollars directly on its balance sheet. The company reportedly has many tens of billions of dollars committed by investors but not yet invested. In the past, this amount was reported as being over $100 billion – some of that has been deployed, but I read recently that the company had something like $67 billion still to deploy. As such funds are deployed into fee-bearing investments, they start to generate fees for Brookfield Asset Management, driving future growth.

Asset-light business model

One of the biggest strengths of Brookfield Asset Management is its asset-light business model. This means that it does not own heavy assets, at least not directly; it manages them for clients, but does not hold them on its balance sheet. This leaves it with little in terms of recurring costs such as inventory storage costs, depreciation, maintenance and so on. The end result of this is high margins, as we shall see in the next section.

High margins and growth

One thing that Brookfield Asset Management has in spades is high margins. Among other great profit metrics, the company boasts:

  • A 71% gross profit margin.
  • A 62% operating income (EBIT) margin.
  • A 50% net margin.
  • A 57.5% free cash flow (FCF) margin.
  • A 31.4% return on equity.
  • A 15.4% return on total capital.

These are frankly some of the best profitability metrics you’ll see anywhere, and it’s partially a function of BAM’s status as an asset-light company. With few recurring costs, the company is free to throw off a lot of cash.

BAM is no slouch on growth either. The company increased its revenue 21% and operating earnings 20% in the trailing 12-month period. It’s a similar story over the last five years, a period that has seen the company do much growing. Finally, the company’s large amount of committed capital suggests that this growth will continue into the future.

Quality leadership

As a final note:

Brookfield is known for having a quality management team. Bruce Flatt has run the parent company through many decades of outperformance; current CEO Conor Teskey is also well regarded; and legendary bond investor Howard Marks is on the parent company’s board of directors. This is the kind of team you want running a company in your portfolio, and it’s hard to beat Brookfield’s.

Fool contributor Andrew Button has positions in Brookfield Asset Management. The Motley Fool recommends Brookfield Asset Management. The Motley Fool has a disclosure policy.

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