Mohnish Pabrai Buys Brookfield Asset Management

Summary

• The guru entered a 180,303-share position in the investment management company.
• He did not make any changes to his two other U.S. holdings.

After reducing his stake in Seritage Growth Properties (SRG, Financial) for the past two quarters, renowned investor Mohnish Pabrai (Trades, Portfolio), who is the managing partner of Pabrai Investment Funds, mixed things up a bit when he disclosed a single buy transaction in his equity portfolio for the third quarter of 2022.

As a result of not being able to find good opportunities in the U.S. market, the value-focused guru, who runs an extremely concentrated portfolio of discounted, out-of-favor stocks, told GuruFocus in a 2019 interview that he moved the vast majority of his portfolio into India, Turkey and South Korea. The U.S.-based portfolio, which is currently valued at $99 million, represents a small fraction of the California-based firm’s assets under management.

According to the 13F filing for the three months ended Sept. 30, Pabrai established a position in Brookfield Asset Management Inc. (BAM, Financial).

Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.

Brookfield Asset Management trade

The guru invested in 180,303 shares of Brookfield Asset Management (BAM, Financial), allocating it to 7.46% of the equity portfolio. It is now Pabrai’s second-largest holding. During the quarter, the stock traded for an average price of $48.04 per share.

GuruFocus data shows he has lost about 3.50% on the investment so far.

Valuation

The Canadian alternative investment management company headquartered in Toronto, which oversees more than $750 billion in assets, has a $76.18 billion market cap; its shares were trading around $46.21 on Tuesday with a price-earnings ratio of 22.47, a price-book ratio of 1.88 and a price-sales ratio of 0.87.

The GF Value Line suggests the stock is fairly valued currently based on its historical ratios, past financial performance and analysts’ future earnings estimates.

Further, according to backtesting, the GF Score of 91 out of 100 indicates the company has high outperformance potential. While Brookfield received high ratings for growth, profitability, GF Value and momentum, its financial strength rank was low.

Overview of quarterly results

On Nov. 10, Brookfield reported its earnings results for the third quarter.

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For the three-month period ended Sept. 30, the company posted net income of $423 million, or earnings of 24 cents per share, on $23.42 billion in revenue. While net income was down from the prior-year quarter, revenue grew.

In a statement, Brookfield Chief Financial Officer Nick Goodman commented on the “excellent results.”

“Earnings were supported by strong growth in our asset management franchise and the solid performance of our operations,” he said. “As a result of the strength of our franchise, we are increasingly becoming the partner of choice for global corporates for the deployment of capital at scale—as evidenced by our recent $30 billion partnership with Intel
INTC
(INTC, Financial), our $17.5 billion partnership with Deutsche Telekom Towers (XTER:DTE, Financial) on their portfolio of 36,000 telecom towers, and our $8 billion partnership with Cameco (CCJ, Financial).”

Financial strength and profitability

GuruFocus rated Brookfield’s financial strength 3 out of 10. As a result of the company issuing new long-term debt over the past three years, it has weak interest coverage. Further, the low Altman Z-Score of 0.54 warns the company could be at risk of bankruptcy if it does not improve its liquidity. The return on invested capital is also overshadowed by the weighted average cost of capital, meaning the company is struggling to create value as it grows.

The company’s profitability fared much better, scoring a 9 out of 10 rating even though the gross margin and operating margin are in decline. Its returns on equity, assets and capital, however, are outperforming around half of its competitors. Brookfield is also being supported by a high Piotroski F-Score of 7 out of 9, meaning conditions are healthy, while consistent earnings and revenue growth contributed to a predictability rank of four out of five stars. GuruFocus research found companies with this rank return an average of 9.8% annually over a 10-year period.

Guru investors

Of the gurus invested in Brookfield, Andreas Halvorsen (Trades, Portfolio) has the largest stake with 0.90% of its outstanding shares. Chuck Akre (Trades, Portfolio)’s Akre Capital, Tom Gayner (Trades, Portfolio), Ron Baron (Trades, Portfolio), Murray Stahl (Trades, Portfolio) and Jim Simons (Trades, Portfolio)’ Renaissance Technologies also have sizable holdings.

In comparison, Pabrai’s position accounts for only 0.01% of the company.

ditional holdings and portfolio composition

Pabrai’s other two holdings in his equity portfolio are semiconductor company Micron Technology
MU
Inc. (MU, Financial) and Seritage Growth Properties, a real estate investment trust.

The technology sector has the largest presence in the guru’s equity portfolio with a 92.51% weight, followed by financial services with representation of 7.46% and real estate with 0.03% exposure.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.