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Media Co-op Investor: March

We Check Out the Assets of Brookfield

by Gwalgen Geordie Dent

Media Co-op Investor: March

Welcome to Media Co-op Investor!

The Media Co-op Investor Series aims to help the general public understand the stock market, how it works, and the major companies which benefit from it.

Every two weeks we examine an element or term in the stock market, how the Toronto Media Co-op has done fake-investing in companies on the Toronto Stock Exchange as well as highlighting specific large Canadian Companies, why their price has gone up and down and what they are all about.

To learn more go here.

This Week's Term:  Price to Earnings Ratio or P/E

Price-to-Earnings Ratio is a term tossed around very often in individual and index stock analysis.  

For example, a blog looking at company Valero from a couple of days ago in Forbes: "Valero is not an expensive stock, despite the recent stock movement. Not only does it have a low P/E ratio, but its price-to-sales ratio is well under 1.0, at 0.2."

If one was to go about buying shares in a company (and you knew what you were doing), you'd want to know as much about the companies state as possible.  

A Price-to-Earnings Ratio, is simply a statistical measure used to determine if a company's stock price might stand to go higher (or lower) than it currently is.  It looks at two main variables:  How much each share is currently worth (the Price); divided by how much the company makes every year per share (the Earnings).  

For example, a company's stock might be trading at $10.  However if you looked at how much a the company made last year (for example $10,000) and then dived it by how many shares it has issued (for example 5,000) you might find the company is making only about $2 for every share that exists.  
So $10 dived by $2 would give you a P/E of 5.

P/E is usually used as a tool to analyze how investors feel a company will be doing in the long run.  
Companies that suffer an annual loss, will generally have a negative or "N/A" when it comes to their P/E.  Why would anyone invest in such a company?  If the loss was a one-time thing (many companies went through this during the financial crisis) then the company may still rebound next year.

Company's with a low P/E usually are thought to be on-the-ropes in terms of their future or, alternatively, they could be undervalued.  Another possibility is that their earnings would be higher for one-off reasons (like a one-time windfall) at the time the P/E was calculated (which would give it a lower P/E).  

Companies with a low P/E are often times considered risky bets.  If a company has a good track record, but it's stock value has declined (maybe because the whole industry is down) then many analysts would say "BUY!".  The reasoning is that the company's stock price has declined due to forces outside it's control, but it's still making money so the stock price will go up later.

Companies with higher P/E's usually are thought to be companies that are going to be making a lot more money in the future or they're overvalued.  The stock price might go up a bit more, but, if it's not overvalued, it won't be by that much.

A really high P/E will often be the signal of a speculative bubble.  People start paying more and more for a stock even though the underlying amount it is making and its prospects for growing stay the same.

P/E can tell you a basic snap-shot of a company but it can only tell you so much.

A company might have a really high P/E which would point to it growing or being possibly overvalued.  CanWest Global was such a company before the financial crisis.  Its earnings and stock price were high and growing in 2006-08.  What the P/E ratio didn't look at though was the amount of debt that Canwest had.  As its prospects for advertising revenue went south during the financial crisis, the amount of debt it had and the interest to be paid, made its P/E shoot down in a short period.    

Similarly, many investor-pundits were touting Bear Stearns and Lehman Brothers stocks as the financial crisis started unfolding in 2008.  The reason?  Their P/E's were historically low.  Earnings had hummed along in the year previous making them believe the stock price was abnormally low.

Of course as the year went on it became clear that both companies were not only severely in debt, but that their 'earnings' were based on revenue that was about to be non-existant.  

While P/E is a good analytical tool, the important thing to remember is that you can count on it about as much as the "hidden hand of the market".  The devil, is always in the details.

What we invested in this week

This week we tracked our largest Canadian financial stocks.  We theoretically-bought about $1000 worth of each company on September 15th.

How we did this week

And my how the money rolls in...

After a dismal 2010 where the return hovered around 5%, our financial stocks have risen by 11.6%.

Though fears of losses and devaluations have been rampant for the financial stocks all throughout last year, it seems that those fears are over.   Debt levels remain high for consumers and a Canadian housing bubble keeps ballooning.  Still many investors seem to think that  the Canadian economy is on stable ground.

Though there are some major positive signs for the Canadian economy, everything is still up in the air.

On one hand, manufacturing in Canada is being buoyed by a US demand, even though the Canadian dollar is still high.  Oil prices are going up which could spell a boom for the oil sands.  

On the other, being still entirely dependent on the US means that Canada will follow their lead.  The US of course is still keeping interest rates at zero, is still pumping billions $US into their financial system and though it added jobs in March, it is still here in terms of its recessionary unemployment. Problems in the Middle-East and in Japan could lead to major domino effects that no one is able to predict in terms of manufacturing chains, oil production, and the reserve currency status of the US dollar.

Economists of a different ilk at the 2011 Left Forum in New York in March were also warning of severe problems for the US and world economy in the future.

As Portugal spirals towards an all-too-predictable bailout (Spain's next), David McNally of York University warns that there is no plan for how the world economy will be driven in the near future.  While many top investors and economists have suggested "emerging markets" it's clear that they're simply hoping for growth in these regions even though there's clear-cut reason why it will spontaneously develop.

Polly Cleveland of Columbia University similarly warned that a pile of debt from corporate buyouts by private-equity firms before the crash is about to come due.  This will be another shock to the financial system that will require ever bigger bailouts and more government intervention.

Meanwhile, in Canada many of the companies and issues we've highlighted have been busy.  
Cameco is suffering from the fallout of nuclear power in Japan.  The Stronach family has just stepped away from Magna, selling their shares.  Toronto Dominion bank came out dead-set against the TSX Merger (could have something to do with their competing stock exchange - Alpha Group).  Bombardier finally had a good quarter boosting their profits.

Today's Company: Brookfield Asset Managment

Brookfield Asset Managment is a massive Canadian company which...you guessed it... manages assets. Started in 1899 in Soa Paulo, Brazil by a Canadian and American entrepreneur it, up until about 1910, focused mostly on rail, tram and electricity works in the South-American country.  
In 1912, it incorporated as a Toronto public company with the aim of developing hydro and utility works in Canada as well. From there things get murky.

The original company having amalgamated operations in Rio and Sao Paulo was called Brazilian Traction, Light and Power Company.  It changed again to Brascan in the 1960's.  It then merged with several companies over the next 40 years including The Edper Group, Carena Properties, Trizec Properties and The Multiplex Group.  In 2005, it became Brookfield Asset Management and now has over $100 Billion in assets, headquarters in Toronto and New York,  assets in property, electricity, timber, and finance and several subsidiaries including Brookfield Renewable Power, Brookefield Incorporacoes, Brookfield Properties,  PD Ports, Royal Lepage, and Brookfield Infrastructure Partners.

Brookfield's reach and diversity is staggering.

 It has a stake or outright ownership in Ports (Europe and Australia), energy projects (USA, UK, New Zealand, Chile, Canada, Australia), hospitals (Australia, UK), lumber (Canada, USA) and major commercial property including Queen's Quay (Toronto), One Liberty Plaza (New York), Enbridge Tower (Edmonton),  Suncor Energy Centre (Calgary), Royal Centre (Vancouver), and a host of other condominium and commercial property projects in the US and Canada.

In the last year, Brookfield has been busy at what it does best: buying up troubled or bankrupt companies and restructuring them.  In August, they closed the deal to buy Australia's Prime Infrastructure and it's network of coal and natural as systems.   In May, they took over the US shopping mall owner General Growth Properties Inc. In March, Fraser Papers' Edmundston in New Brunswick had a consortium of owners (mainly Brookfield) force another painful restructuring plan onto workers which cut their pensions by 30 percent. The workers had just restructured and given up concessions a year before.

Of course, being a massive asset company generally involves being politically connected.

Given it's extensive timber operations in BC, it's no surprise that since 2005, the company has given over $100,000 to the BC Liberals.

In addition, Frank McKenna, former Premier of New Brunswick, Canadian Ambassador to the US and touted Federal Liberal leadership candidate sits on their board.  Another board member is Jim Pattison, the 4th richest Canadian and onwner of the Jim Pattison Group, the third largest private company in Canada.

Jack Mintz is another board member.  Mintz is an economist who has been frequently quoted in the press over the past few years as the go-to guy for Canadian economic and tax policy.  He is in favour of the HST and the constant lowering of corporate taxes.

Of course the company that he sits on the board for, Brookfield is notorious for using Canadian resources like timber and electricity to make a profit.  At the same time, merging  operations with companies Bermuda (and other countries) exempts them from paying specific Canadian taxes and following some Canadian laws.

We fake-bought Brookfield stock in September for $28.34.  It's risen to $31.40 for a gain of over 10% or $91.80.  

Archive

September: Potash Corp

September #2: Suncor and ARC Energy Trust

October: Shoppers Drugmart and Barrick Gold

October #2: Scotiabank and Power Corporation of Canada

November: Cameco Corp and TransCanada Corp

December: Saputo and Bombardier

December #2: First Quantum and Manulife Financial

January: Quarterly report

February: Magna


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