Brookfield Positioned for Recovery

Richard Croft
December 5, 2011
3 minutes read

One of the sectors usually associated with non-cyclical stocks is real estate. You can see that in the sectors performance. The S&P/TSX Capped Real Estate Index was ahead 2.6% year-to-date to the end of November. It is up 6.3% over the past 12 months.

That’s not too surprising, given that the bulk of the index comprises Real Estate Investment Trusts. Dig dipper and the S&P/TSX Capped REIT index, consisting only of REITs, was ahead 13.3% year to date for November and 13.6% for the 12 months ended Nov. 30.

But that enthusiasm hasn’t spread to all members of the family. Brookfield Asset Management Inc. (TSX: BAM.A, recent price $27.93), the real estate, power, and infrastructure conglomerate is actually down 15.9% year to date. Makes you wonder? Brookfield is one of the world’s finest asset managers. It is financially solid and carries less leverage than banks. Not to mention a number of different revenue streams from around the globe, giving it unparalleled currency hedging capability.

Right now, Brookfield is doing what it does best – adding to assets at fire sale prices. Which may account for the company’s short term under performance? It recently assumed ownership of three upscale resorts in the Bahamas as a lead creditor of property developer Kerzner International Holdings Ltd. Kerzner is undergoing a restructuring.

In a US $2.5 billion deal, it recently took US mall developer General Growth Properties out of bankruptcy. Brookfield now holds 40% of the company. Brookfield also reached a tentative deal to take over the collapsed Stuyvesant Town apartment complex in Manhattan… one of the biggest real estate busts of the last two years.

Clearly, Brookfield, taking advantage of its deep pockets, is on the hunt for bargain properties, and is reportedly actively evaluating real estate deals in Europe that have collapsed during the eurozone crisis.

Shares of Brookfield have become deeply oversold during the market turmoil this year. Even a partial resolution of the eurozone crisis, combined with continuing growth in North America, is likely to put the afterburners on Brookfield stock. Aggressive options traders might consider taking bullish positions in Brookfield Asset Management now.

Specifically look at the BAM July 28 calls at $2.30. This is an aggressive trade in which you should only use capital you can afford to lose. There is some significant upside potential, but from a cash management perspective, consider selling half your position if the calls rally to $4.60 or better.

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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