The Source Rossa O'Reilly, managing director and analyst, CIBC World Markets.
The Idea Buy shares of Brookfield Asset Management Ltd.
Over the past 10 years, Brookfield Asset Management shares have swung from a discount to a premium of net asset value and back again, depending on the economic cycle and investors' view of where real estate prices were headed. The company has controlling interests in publicly traded Brookfield Properties and Brookfield Homes.
In 2007, when things were booming, the shares soared to a 34-per-cent premium just about the time net asset value peaked at $40 (U.S.) a share, Mr. O'Reilly noted in an interview. They plunged to a discount of 38 per cent early in 2009, when net asset value (NAV) tumbled to $20 a share.
They now trade at about a 10-per-cent discount to Mr. O'Reilly's estimated NAV of $26 a share.
He uses NAV rather than the usual multiple of earnings or cash flow because the company is in so many different businesses. It is a highly opportunistic investment management company with interests in real estate, power generation and infrastructure, among other things.
In an especially interesting development, Brookfield Asset has cast its eye at General Growth Properties, the second largest shopping mall owner in the United States with a first-class portfolio of shopping centres.
"They're very profitable malls," Mr. O'Reilly says. "There's nothing wrong with General Growth profit-wise. The only problem was that a large amount of debt came due during the credit crunch and it could not be refinanced."
While it may not win the shopping mall giant, if it did, it would be a strategic move at a very good price, Mr. O'Reilly says.
"It's a very capable company in their areas of investment."
Brookfield Asset has plenty of money - nearly $3-billion - and because it manages money for its investment partners, it has another $6.7-billion of private capital that it can call on if it decides to make an acquisition.
Mr. O'Reilly's target for the shares is $28.50 over the next 12 to 18 months, equivalent to his forecast for net asset value. If and when economic growth picks up in the United States, it is reasonable to expect the stock will once again rise to a premium.
"It's an undervalued stock that has appreciation potential in the more positive stock market environment that we expect in the next couple of years."
The Payoff Capital appreciation in a reasonably short time and a 2.2-per-cent dividend yield as well.
The Big Risk "An economic or stock market downturn," Mr. O'Reilly says. "Brookfield Asset shares tend to magnify movements up and down in the market."
Even so, management has "a great deal of consideration for risk and have maintained a high liquidity cushion whenever they felt things might be turning down," he adds.
Why Listen to Rossa O'Reilly? Mr. O'Reilly has been an analyst for 39 years, most of them spent at CIBC World Markets and its predecessor, Wood Gundy. As well as being one of the most respected analysts in the business, he has a knack for getting his earnings forecasts right. And where earnings go, stock prices usually follow.
Special to The Globe and Mail