Long-Haul Buys: A Pair

A pair of my favorites are buys once again, for the first time in a long time. So I thought I would spend a little time fleshing out why these two stocks are such good ones to own for the long haul.

The first is Brookfield Asset Management (NYSE:BAM), which owns 170 hydroelectric and wind facilities; 275 million square feet of commercial real estate; and ports, railroads, pipelines, transmission lines and timberland. The company is a storehouse of hard assets that should provide good returns over time. In fact, the stock has been a great performer:

Common Share Performance of BAM and the S&P 500

I love that management owns 19% of the stock, which probably has a good deal to do with that outperformance. BAM is not likely to do stupid things. In the past, BAM, led by CEO Bruce Flatt, has been an ace acquirer of distressed assets. “We’re in the business of buying great assets at less than replacement cost,” Flatt says. This is exactly what we try to do in my Capital & Crisis newsletter, and it’s a good sign for BAM.

BAM itself is cheap again. Net tangible assets alone are worth at least $33 per share, based on the IFRS (International Financial Reporting Standards). These are fair value estimates used in BAM’s financial statements on which it reports every quarter. Then there is the franchise value of its asset management business, estimated at $6 per share. All together, BAM’s net asset value is at least $39 per share, and growing.

BAM also generates $1.5 billion in free cash flow annually. The market cap is about $18 billion today. So you are paying only 12 times free cash flow for BAM, a price not often seen for a business of this quality.

In addition to BAM, Canadian Natural Resources (NYSE:CNQ) is a buy once again. Of the large oil companies, this is by far my favorite. One of the reasons I like it is captured in the nearby chart. The management team owns a good chunk of stock, far more than peers. Murray Edwards, vice chairman and large stockholder, co-founded CNQ back in 1998, when it had nine people and a market cap of $1 million.

CNQ is way off its high of $52 per share, giving us a chance to add to this wealth-creating oil behemoth. You can pick up shares on CNQ at only six times 2010 cash flow, at $5.81 per share. It is also a low-cost producer of both natural gas and heavy oil.

This is only a part of CNQ’s value, which resides in a large, high-quality asset base. This net asset value has increased dramatically since we’ve owned it, as the nearby chart shows. CNQ’s net asset value per share is north of $60 per share.

Estimated Pre-Tax Net Asset Value Per Shar of CNQ

That’s a 20% compound annual growth rate since 2000! It has what the Street likes to call “organic horsepower.” With just the assets it owns currently, CNQ could increase oil production by 10% each year for the next three years. Also, there is potential for big discoveries. The company has identified five 1 billion-barrel oil structures off the coast of South Africa. Drilling commences in 2012.

With its focus on return on investment and a strong balance sheet, I expect CNQ to continue to deliver good results for shareholders over time. It’s one of the few oil stocks I’d hang onto through the economic cycles.

As with BAM, CNQ can use the downturns to pick up assets on the cheap. Both have done so in the past. That is how you play a crisis.


Chris Mayer,
for The Daily Reckoning