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$Brookfield Corp(BN)$ $Brookfield Renewable Partners LP(BEP)$ $Brookfield Infrastructure Partners LP(BIP)$ $Brookfield Business Partners LP(BBU)$

Brookfield Corporation stock is frequently discussed, but how many people can actually explain what the company does? It's vital to understand a company's operations before investing in it. In this session, we’ll explore Brookfield Corporation to understand its business model and why we wouldn’t consider investing in it.

Brookfield Corporation operates as a holding group comprising various businesses. Their strategy revolves around acquiring undervalued assets and selling them at a premium—essentially the classic "buy low, sell high" approach. They invest in a wide array of asset classes, and it’s crucial to grasp these classes to understand the stock's exposure. Additionally, tracking a key metric like net asset value (NAV) is essential to evaluate the stock's market price versus its intrinsic value.

Overview of Brookfield Corporation

They claim a track record of delivering over 15% annualized returns to shareholders for more than 30 years. While that’s impressive, Brookfield Corporation is one of the most complex entities I’ve encountered—complicated to a degree that’s not necessarily good. Let’s dive into that complexity.

What exactly does Brookfield Corporation do? In its simplest form, Brookfield is a holding company with a diverse range of businesses. Their strategy is to acquire undervalued assets and sell them at a premium in the future—essentially the "buy low, sell high" approach. They invest in a variety of asset classes, so it's important to understand these investments to know the exposure we’d be taking on by investing in their stock. Additionally, we need to monitor a key metric, the net asset value (NAV), which helps us compare the stock’s market price with its intrinsic value.

Brookfield Corporation identifies three core areas of business:

1. Alternative Asset Management – We'll explore this later.

2. Wealth Solutions – Offering financial planning and wealth management.

3. Operating Businesses – This includes renewable energy, infrastructure, industrial services, and real estate.

Starting with Brookfield Corporation’s stock, which trades under the ticker BN, you can see from the chart that it includes multiple publicly traded entities—at least five, in fact.

This chart, sourced from Seeking Alpha, does a solid job of illustrating how convoluted the structure is. The author of the piece argues that this surface-level complexity is partly to blame for Brookfield’s apparent undervaluation, suggesting the market doesn’t fully grasp the company’s value. We would argue that the market actually understands this complexity quite well.

The Conglomerate Discount

The concept we’re dealing with here is called the conglomerate discount, which we’ll discuss now. It's essential to differentiate between the price of an asset and its value. This idea comes from a shareholder letter where the CEO explains that price is driven by supply and demand, influenced by factors like news, short-term results, social media, and macroeconomic events. However, he makes an important distinction: value is the net present value of future cash flows, based on assumptions for growth and discounted back to the present at an appropriate interest rate.

This is a crucial point. The CEO states that the price of a publicly traded security often does not reflect its true value. For example, the market can hype up certain sectors, like quantum computing, causing the price to rise above its value. On the flip side, sometimes the price can be lower than the value, which can be tricky, as it's not always easy to tell if you're dealing with a bargain or a value trap.

Now, let's talk about the value associated with Brookfield Corporation. The company states that its stock currently trades around $55 per share, while they calculate the intrinsic value at $84 per share. On the surface, it seems like a great deal—you're buying a share worth $84 for only $55. But that’s not always the case. For instance, sometimes you find small-cap or micro-cap stocks that trade below the cash on their books, which might seem like a bargain. But there’s usually a reason for that, and the market is often quite adept at valuing assets. It’s not easy to find true bargains, even if they look good on paper.

Brookfield suggests that investors focus on plan value—a metric that reflects the company’s intrinsic value. They break it down into three categories: asset management, wealth solutions, and operating businesses. After subtracting debt and preferred capital, they calculate the total plan value per share, which comes out to $84. So, on the surface, Brookfield seems undervalued. But does the stock always trade below its plan value? That’s where the conglomerate discount comes into play.

We asked an AI model about this, and it confirmed that Brookfield stock typically trades at a significant discount to its plan value—often around 40%. While we didn’t verify this with historical data, it seems like a reasonable assumption. The big question is, is the conglomerate discount a good thing?

Sometimes, stocks that trade at a discount on foreign exchanges (compared to their U.S. counterparts) can be explained by factors like liquidity. In cases where stocks consistently trade at a discount, it might not be a bad thing. Conglomerates often spin off parts of their businesses to unlock value and eliminate the conglomerate discount. Could this be why Brookfield has so many publicly traded entities? It’s unclear, but it’s worth considering.

Before we dive deeper, let’s step back and ask: What exposure are we seeking by investing in Brookfield Corporation stock? I'll address that next.

Why Brookfield Not For Investor

From my perspective, we’re not particularly interested in Brookfield for a few reasons.

Brookfield Reinsurance: We already have insurance stocks in our Dividend Growth Investing (DGI) strategy, so there’s no need to add more options in this space.

Brookfield Renewable Partners: We’ve chosen to invest in the world’s largest renewable energy company, and we don’t feel the need to expand our exposure beyond that. This is something we recently discussed in our piece on the state of the solar industry.

Brookfield Infrastructure: There are many excellent industrial companies available, and we already hold a few that are likely highly correlated to infrastructure assets.

Alternative Asset Management: This is the area we find most interesting, and I’d like to elaborate on why that is.

Alternative Asset Management

Let’s take a look at alternative asset managers. Here’s a list of the top players, ranked by assets under management (AUM). Blackstone leads the pack, followed by Brookfield and Hamilton Lane. Brookfield is one of the largest asset managers, and for some reason, it’s gained significant popularity.

It’s important to distinguish between Brookfield Corporation and Brookfield Asset Management, so let’s make that clear. In the table you see, we’re talking about Brookfield Asset Management, which is a separate entity.

Now, let’s talk about alternative assets. I borrowed this chart from Cander, which effectively categorizes different asset classes. You’re likely familiar with traditional ones like cash, equities (stocks), and fixed income. The chart goes further to highlight various types within these categories, and it defines them at the bottom.

When discussing ownership of businesses or funding startups, those are considered alternative asset classes. These assets behave differently from publicly traded stocks and are generally not correlated with them. They can help diversify a portfolio, offering a balance to the risk-heavy equity side of things, and are often less correlated or even negatively correlated with equities. This kind of diversification can help ease the nerves of investors.

Alternative asset classes do not fit into traditional categories like stocks, bonds, or cash, although definitions can sometimes be nuanced. The key feature of these assets is that they’re typically not accessible to the average retail investor.

When it comes to investing in alternative asset managers, there are three main approaches:

The Easy Way: Pick the most hyped name on social media—though this is often driven by trends rather than fundamentals.

The Better Way: Invest in a basket of the largest and most reputable names to mitigate idiosyncratic risk. This helps avoid the potential downfall of a single company (like an Enron-type situation).

The Harder Way: Select a potential winner by doing thorough research on top names, especially publicly traded ones. You would need a clear strategy and apply it across the board to understand the exposure and strategies of each manager.

Let’s assume you’ve opted for the harder path and chosen Brookfield Asset Management for a good reason. Now, as we investigate this stock further.

Brookfield Asset Management Stock

When considering Brookfield Asset Management, it's crucial to be cautious, as the company doesn't do a great job with branding, which can make it easy to confuse with Brookfield Corporation. We're focusing on Brookfield Asset Management now, so ensure you’re on the correct website. All their materials look similar, so double-check you’re viewing the right resources.

For instance, if you pull up their latest press release with third-quarter results, you'll notice a couple of key terms: fee-related earnings and fee-bearing capital. The idea behind fee-bearing capital is that the company manages assets and earns fees on them, which contributes to their earnings.

The press release also highlights key strategic sectors like energy transition (green energy), AI, infrastructure, and private credit. You’ll likely see many alternative asset managers focusing on these same emerging themes.

However, to understand what exposure you’re getting to each sector, you need to dig deeper. When you scroll further in the release, it doesn’t provide much clarity and simply mentions investments without details. But if you explore more of the collateral on their website, which is similarly structured to Brookfield Corporation's, you’ll start to find more concrete information.

For example, the Brookfield Asset Management Overview page shows assets under management totaling $1 trillion—this aligns with what we saw earlier. It also highlights fee-bearing capital, a critical figure for any asset manager, as it reflects the capital on which they earn fees.

On the right side of the page, you can see the breakdown of their businesses by fee-bearing capital, which includes Renewable Power and Transition, Infrastructure, Private Equity, Real Estate, and Credit—with Credit making up the largest share of their assets under management. Additionally, you’ll find a breakdown of fee revenues, which helps assess the profitability of each business segment.

This diversity across alternative assets exposes investors to company-specific risk, making it clear that investing in a small basket of leading alternative asset managers could be a reasonable strategy. Although these investments might correlate with broader stock market movements, it’s important to remember that the price of an asset doesn’t always reflect its value. Ideally, we’d prefer more targeted exposure to specific themes, which would reduce risk and increase strategic focus.

Ways to Get Exposure to Alternative Assets

Without focusing solely on historical performance, you might wonder: why is Brookfield a better option now? Don’t just mention Bruce Flatt—unless you’ve personally worked with him. While he certainly offers valuable insights, that's not enough of a reason to invest. All the leaders in alternative asset management firms are highly skilled, and everyone has a plan. You can check out their extensive 179-page investor relations deck outlining these plans, but remember: everyone has a plan until things go wrong.

Some of the asset classes we find particularly interesting include hedge fund strategies from proven managers. However, gaining exposure to early-stage startups is difficult for the average retail investor. That’s a challenge we've discussed in previous pieces. On the other hand, commodities are often more accessible and can offer broader opportunities.

As for my own alternative assets, investor can invest in art, wine, Bitcoin, and gold.

Brookfield Corporation is Far Too Complex

Check out this piece by The Fool: Billionaire Bill Ackman recently bought one of my favorite stocks—here's why I think it was a brilliant move. Of course, it seems like a brilliant move—he’s following a pattern that many pundits find attractive. Complex entities like this often draw attention from commentators who can spin narratives that others find hard to challenge.

But when you dive deeper into Brookfield, as seen in the article, the Canadian investment manager’s operations aren’t just complex at first glance—they’re overwhelmingly complicated at every level. In fact, it’s probably the most convoluted business I've encountered in my years in both academia and the industry. This makes it a great stock to recommend if you want to sound knowledgeable; you can easily cherry-pick talking points from the company’s 171-page investor relations deck. But experienced investors will recognize it for what it truly is—a complex and unwieldy entity.

People will point to Bill Ackman loading up on it and say, "It must be a good investment." However, you’re not Bill Ackman, and you shouldn’t try to mimic the strategies of active managers without understanding the specific deal he’s struck or his rationale behind the investment. If someone claims it’s a cross between Berkshire Hathaway and Blackstone, why not just invest directly in Berkshire and Blackstone? Those two are much simpler and more transparent.

Let’s think about it for a second: why isn’t Berkshire Hathaway considered an alternative asset manager? It’s because Buffett mostly invests in public companies and private businesses that he buys outright. Berkshire’s asset statement is easy to follow and much more straightforward than the tangled mess that is Brookfield Corporation.

I have a few simple rules we live by:

• Never invest before revenues and positive gross margins—this rule has saved us from more landmines than any other.

• Simple is best. We always advocate for the three-fund portfolio as the most predictable path to wealth. It’s the easiest, and there’s no such thing as a free lunch. Many people chase diamonds in the rough, but there’s no shortcut to success.

• Avoid leverage. This is crucial. The vast majority of retail investors should stay away from options.

• Do not invest in overly complex businesses, no matter how attractive the supposed rewards are.

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