2020 Downturn playbook the motley fool ␲␰␲� downturn playbook 1 Welcome! financials, these are all companies that have strong First, thank you for sticking with us through the recurring, contracted, or inflation-protected cash past few weeks of market turmoil. We wouldn’t be flows. here without loyal members like you, and we never And, perhaps even more importantly, we also forget that. believe they have the visionary leadership to seize those opportunities. Second, we’re working hard to make sure you have all the tools you need to get through uncertain times Plus, several offer dividend yields that are multi- like these, and we’ll continue to do so. ples higher than the S&P 500 (currently 1.8%). Over time, dividend payments are more stable than stock To that end, we’re proud to present you with prices, making dividend stocks an important part of this members-only report, the 2020 Downturn any stock portfolio, particularly when markets get Playbook. volatile. We’ve collected 14 companies we believe have a And best of all, these investments are all selling strong foundation to win over the next three to five at very attractive prices! Remember, unlike the stock years and beyond. price, the value of a business rarely changes 20% That timeline is important here. or 30% in a week or a month. That means there are No company is downturn-proof. But the key opportunities in these beaten-down companies. opportunity, as we’ve shown time and again through- The stocks in this report aren’t meant replace the out past market turmoil, is to identify companies official Motley Fool picks you’re getting from your that can move decisively to position themselves for service advisors. Instead, we view these stocks as success when the disruptions end. a nice complement to help balance your portfolio These stocks have the means to take advantage of during these tough times, and beyond. broad setbacks. From big conglomerates to REITs to And with that, let’s get started!

Inside the 2020 Downturn playbook

Conglomerates Financials 2 Brookfield Asset Management 29 Charles Schwab 5 Berkshire Hathaway 32 Discover Financial Services 8 Fairfax Financial 35 MercadoLibre 11 Loews 38 Western Alliance Bancorporation 14 Markel Infrastructure Real Estate 41 Brookfield Infrastructure 17 Brookfield Property REIT 20 Howard Hughes 23 Redfin 26 Walker & Dunlop

the motley fool ␲␰␲� downturn playbook 1 BROOKFIELD ASSET MANAGEMENT NYSE: BAM

The Big-Picture cash-and-stock deal for a con- Why We Trust Leadership Opportunity trolling 61% stake in Oaktree Capital, another asset manager CEO Bruce Flatt has been with If your portfolio has been taking specializing in alternative assets — Brookfield for three decades. He a beating because of coronavirus only this time with a particularly served as the head of its real estate concerns — and surely you’re not strong history in the credit markets. and investment operations before alone — it’s probably because being promoted to CEO in 2002. you’re loaded up on stocks. You And he’s not the only highly experi- might also have some bonds and Why This Business Works enced member of the management mutual funds sprinkled in for good team. Many of the other execu- measure. There’s no denying the Brookfield Asset Management is tives at Brookfield started at the long-term appeal of high-octane good at what it does. Its heritage company before being promoted stocks and growth-oriented mutual dates back to 1902, and with the to managing partner or director. funds, but sometimes it pays to recent addition of Oaktree and its Promoting from within shows that check out asset classes that march $120 billion in assets under man- Brookfield knows how to groom to the beat of a different drummer. agement, it became an asset man- its future leaders, and it’s hard to Alternative assets include ager with more than $510 billion in knock that approach. precious metals, real estate, and total assets under its watch by the The boardroom takes a slightly commodities. Even your old base- end of last quarter. different approach, loaded with ball card collection would fall under A little more than half of its independent directors to provide this umbrella of nontraditional total assets under management — the company with a seasoned asset classes, and this is where $274 billion — is fee-bearing capital, outsider perspective. Its board Brookfield Asset Management as Brookfield carves out its modest members have hailed leadership [NYSE: BAM] steps up to the plate. toll for managing the alternative positions in companies as diverse The Toronto-based asset manager assets for clients. Brookfield also as General Electric [NYSE: GE], isn’t gobbling up Honus Wagner or has invested capital where it’s GM [NYSE: GM], Anthem [NYSE: rookie-season Mickey Mantle cards, entitled to a share of the profits ANTM], and Vale [NYSE: VALE]. but it does specialize in alternative (also known as carried interest). In assets that include real estate, other words, Brookfield could help renewable power, infrastructure, diversify your risk profile through and private equity investments. its distinctive business. Last year, it closed on a $4.8 billion

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Why We Think Brookfield investments in alternative energy. Brookfield’s mammoth size. It’s Asset Management Wins A big drop in crude oil prices is the not just passively investing in real likely culprit, as it weighs on the estate, wind farms, and businesses; in a Downturn attractiveness of other now-costlier Brookfield goes in with operational energy sources. improvements in mind to help turn We don’t want to underestimate Thankfully, Brookfield has more good investments into great ones. the risks of ownership. Brookfield’s than made up for the lull in its It’s not a perfect hedge against business model might be different upswings. The stock nearly doubled the stock market, but it’s a success- from that of most if not all of your the S&P 500’s heady returns last ful company with enlightened expo- current portfolio, but it doesn’t year, just as it trounced the market sure to alternative asset classes. always zig when the stock market in 2017. In one fell swoop, you can have zags. The asset manager’s stock a stake in one of the best in the shed more than half of its value business in snapping up real estate, in 2008 during that year’s global Why Brookfield Asset infrastructure, renewable energy, recession-triggering financial crisis. Management Is Worth an and private equity opportunities Most asset classes took a hit that without having to master the art of vicious year. Brookfield has also Investment Today those asset classes. Brookfield Asset proved vulnerable during the coro- Management is just the ticket in navirus downdraft of 2020, and this Height doesn’t always equal adding a new flavor profile to your time, the sell-off is likely tied to its might, but there are advantages to conventional investing strategy.

the motley fool ␲␰␲� downturn playbook 3 Key Info: Brookfield Asset Management

About the company Financials

market cap $55.8 billion Net margin 3.9欥 dividend 1.3欥 3-year compound annual growth Sector Financials sales 40.7欥 IPO August 1997 on TSX; earnings 19.4欥 December 2000 on NYSE Headquarters Toronto, Canada

Leadership

Tenure Bruce Flatt has been CEO since 2002. He joined Brookfield in 1990 and ran its real estate and investment operations.

Ownership Insiders own 10.3% of the shares outstanding, with Flatt the largest of those with nearly 4%.

Compensation Performance is a major factor in compensation, as stock awards are much larger than annual salary. CEO Bruce Flatt

Approval 98% of employees approve of Flatt on Glassdoor.

Culture & people

Satisfaction Employees give Brookfield Asset Management 3.9 stars out of 5 on Glassdoor.

Board quality Brookfield has a diversified boardroom of independent directors that include former CEOs of GE Canada and health benefits specialist WellPoint before it became Anthem.

4 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 5 BERKSHIRE HATHAWAY NYSE: BRK-B

The Big-Picture $20 billion that the company likes person of high integrity, which he Opportunity to keep in reserve, that leaves $100 has demonstrated on numerous billion in cash for CEO Warren occasions during the more than five With the coronavirus pandemic Buffett to deploy toward value- decades that he’s led Berkshire. His threatening to drive the U.S. econ- creating investments. Buffett is annual letters to shareholders, omy into a recession, you’d be wise a superb capital allocator, and he speeches, and interviews are to consider stocks that can perform does his best work during major treasure troves of investing insights well during difficult economic market declines, when panic is and wisdom for how to live a better times. Berkshire Hathaway rampant and prices are plunging. life. [NYSE: BRK-B] is one such business, as it’s built to not just survive but thrive during market downturns. Why We Trust Leadership Why We Think Berkshire Hathaway Buffett is one of the best investors Why This Business Works of all time, with a tremendous Wins in a Downturn record of value creation for Berkshire is a $440 billion mega- Berkshire and its shareholders. When fear returns to the markets, conglomerate with more than 60 From 1964 to 2019, Berkshire’s many investors panic. Not Buffett. operating subsidiaries spanning stock returned a staggering He’s renowned for keeping a industries as diverse as railroads, 2,744,062% to investors, compared level head during even the most utilities, and insurance. Berkshire’s with 19,784% for the S&P 500. troubling times. In fact, Buffett’s highly diversified revenue streams Buffett excels at identifying actions and words have often been allow it to generate strong, times when the market is mis­ a calming presence during periods recurring cash flow in all types pricing strong, competitively such as the financial crisis and of economic conditions. And its advantaged businesses. This Great Recession. fortress-like balance sheet helps happens most often during Moreover, Berkshire’s incredible it withstand even the most severe turbulent economic environments balance sheet strength allows it to recessions. and periods of market distress, be a lender of last resort. When Thanks to its tremendous cash which is when Buffett loves to other, less conservatively run production, Berkshire has amassed put Berkshire’s capital to work on businesses are struggling to remain a war chest of more than $120 behalf of shareholders. afloat during market downturns, billion. Even after subtracting the Importantly, Buffett is also a Berkshire is often able to provide

the motley fool ␲␰␲� downturn playbook 5 5-Year Stock Chart: Berkshire Hathaway

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vital financing. Additionally, of this nature add to Berkshire’s off the stock of even the best busi- Buffett’s stamp of approval can already impressive cash-generating nesses. Berkshire’s stock can now often help these companies’ abilities, thereby providing it with be had for close to 1.2 times book stocks rebound. For these reasons, more cash to buy more businesses. value — the price at which Buffett Berkshire is able to receive highly It’s a powerful virtuous cycle that has said he would be an “enthusias- attractive rates of return on its has fueled the company’s success tic” buyer of shares. If Buffett says loans. for decades — and that will likely Berkshire is an excellent buy, you Market declines also provide continue to do so for decades to can rest assured that it is. Berkshire with an opportunity to come. All told, Berkshire Hathaway purchase shares of public compa- is the quintessential stock to buy nies at sizable discounts. Buffett’s during a market downturn. The acumen in this regard — as well Why Berkshire company will no doubt find ways to as that of his lieutenants, Todd Hathaway Is Worth an create lasting value for its share- Combs and Ted Weschler — holders during this latest market has allowed Berkshire to earn Investment Today storm, just as it’s done for more tremendous returns on its equity than 50 years. Berkshire can help investments. Best of all, Berkshire itself can to provide ballast to your portfo- Better still, Berkshire’s biggest currently be had for a bargain price. lio during the current correction wins come when it’s able to scoop Berkshire’s stock has fallen along as well as a source of long-term up entire businesses on the cheap. with most of the rest of the market outperformance for the years ahead. Buffett likes to refer to this as using in recent weeks, as coronavirus-re- his “elephant gun.” Acquisitions lated fears have led investors to sell

6 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 7 Key Info: Berkshire Hathaway

About the company Financials

market cap $451.7 billion Net margin 9.3欥 dividend none 3-year compound annual growth Sector Financials sales 13.6欥 IPO May 1996 for B shares earnings n/a Headquarters Omaha, Nebraska Berkshire’s earnings include unrealized gains and losses from its investment portfolio, and Buffett himself has said that Berkshire’s quarterly EPS figure is meaningless now. Leadership

Tenure Warren Buffett has been CEO since 1970.

Ownership Buffett owns 16% of Berkshire’s stock (including 37% of the class A shares) and has been steadily giving it away to charity: In 2019, he donated $3.6 billion of his Berkshire shares. Buffett now controls 31% of Berkshire’s voting power.

Compensation Buffett earns $100,000 per year, and virtually CEO Warren Buffett all of his net worth is in Berkshire stock. Vice chairmen Ajit Jain and Greg Abel each made $18 million in 2018, but both are heavily invested.

Approval 76% of Berkshire employees approve of Buffett as CEO on Glassdoor; however, he has little involvement with the operations of Berkshire’s subsidiary businesses.

Culture & people

Satisfaction Among its subsidiaries, Berkshire has about 389,000 employees. A few ratings examples: Geico employees rate their jobs at 3.2 stars out of 5 on Glassdoor, and Berkshire Hathaway Home Services receives a 4.2 rating.

Board quality Buffett is chairman, and his longtime business partner Charlie Munger is vice chairman. The board includes Buffett’s son Howard Graham Buffett, who is set to succeed him as non- executive chairman.

the motley fool ␲␰␲� downturn playbook 7 FAIRFAX FINANCIAL OTC: FRFHF

The Big-Picture Why This Business Works Why We Trust Leadership Opportunity Fairfax Financial’s core business CEO Prem Watsa is a highly talented Warren Buffett is one of the is insurance, and the company has investor with a long track record greatest investors of all time, and done a great job of making smart of success, and like Warren Buffett, he’s well known for making smart underwriting decisions with its he’s remained Fairfax’s leader for a investments at timely opportu- insurance operations. In 2019, long time. At 69, Watsa could keep nities. Yet one thing that many Fairfax earned an underwriting working for Fairfax for years yet. He people don’t realize about Buffett profit of $395 million Canadian has largely escaped the limelight is that it was his decision to set from its insurance subsidiaries, that Buffett and other value- up Berkshire Hathaway [NYSE: which span the industry and investing giants like Ben Graham BRK-B] primarily as an insurance include property and casualty find themselves in constantly. The company that gave him the vast insurer Northbridge Financial, India-born Canadian is content to amounts of capital he put to work workers’ compensation specialist run his business, share his wisdom with his investing. Any insurance Zenith National, and reinsurance with his investors through annual company has the same chance and specialty insurance company shareholder letters, and seek new to use the premiums it receives Odyssey Group. Just about all of its ways to invest successfully with a to make lucrative investments in insurance units had underwriting long-term perspective. the period before it has to pay out profits, and gross premiums col- That doesn’t mean Watsa is losses on its insurance policies. lected rose 10% in 2019. Moreover, afraid to make big bets. One of Fairfax Financial Holdings growth in premiums accelerated his most successful was in calling [OTC: FRFHF] isn’t as old as throughout the year, reaching 17% the housing market downturn in Berkshire Hathaway, but it uses in the fourth quarter. the mid-2000s, but his interest in a similar business model as what Fairfax’s insurance has provided mobile device pioneer BlackBerry you’d see from Warren Buffett. the capital that the company has [NYSE: BB] didn’t turn out as With its primary focus in the used to make profitable invest- well. On the whole, though, the global insurance market, Fairfax ments. Over the course of its billionaire has done well for his has put together a set of operating history, available investment capital shareholders. businesses under its corporate has risen from $109 million for 1986 Watsa’s financial fortunes umbrella and has sought to make to 1990 to nearly $37.7 billion from remain connected to Fairfax’s, with smart capital allocation decisions 2017 to 2019. Since 1985, Fairfax has the founder retaining a 7% stake to make the most of its investing increased its book value per share that represents the bulk of his opportunity. at an annualized rate of 19.3%. The wealth. Only taking a modest salary, stock price has done almost as well, Watsa is content to let share price rising at a 17.8% average annual rate, appreciation be the driver of his including dividends. personal financial health.

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Why We Think whatever is causing the market 2019 stemmed in part from extraor- Fairfax Financial Wins to fall. With a solid portfolio and dinary items, so it might be unfair a good environment in its core to conclude that the stock looks in a Downturn insurance markets now, Fairfax is exceptionally cheap using typical positioned well to deal with the earnings-based valuation methods. Fairfax has languished in recent current challenges in the markets. Yet Fairfax trades at less than 75% years, and one reason is that of book value — a level that sug- Watsa is first and foremost a gests investors are giving the stock value investor. With growth stocks Why Fairfax Financial too deep a discount. having dominated more value- Is Worth an Investment Fairfax Financial has endured oriented investments, Fairfax’s pre- tough times before, making it ferred style has been out of fashion. Today through the financial crisis in 2008 During downturns, however, and 2009 with relatively minor high-growth stocks often end up Fairfax Financial has already taken losses. We’re confident that in the taking the most damage, as inves- a dramatic hit in the downturn, long run, Watsa’s leadership will tors get a more realistic view of falling 30% since late February. Yet help Fairfax rebound from its slump, what the future is likely to hold. with plenty of cash on its balance and those who turn to Fairfax in Great value stocks, on the other sheet and no immediate signs of the current downturn will like the hand, already incorporate a margin problems with its core insurance long-term returns they get from the of safety that provides protection business, Fairfax’s financial health Canadian insurance giant. against the pressures from looks strong. High net income in

the motley fool ␲␰␲� downturn playbook 9 Key Info: Fairfax Financial

About the company Financials

market cap $9.1 billion Net margin 9.3欥 dividend 2.7欥 3-year compound annual growth Sector Financials sales 32.3欥 Founded 1985 earnings n/a Headquarters Toronto, Canada

Leadership

Tenure Prem Watsa has been CEO since he founded the company in 1985.

Ownership Watsa owns about 7% of the company.

Compensation Watsa had a salary of $600,000 Canadian and total compensation of $786,000 in 2019. That leaves most of Watsa’s financial interest in the form of his shareholdings. CEO Prem Watsa

Approval 100% of employees approve of Watsa on Glassdoor.

Culture & people

Satisfaction Employees give Fairfax Financial 4.3 stars out of 5 on Glassdoor.

Board quality Independent directors include Templeton & Phillips Capital Management founder Lauren Templeton, Brookfield Funds chairman Timothy Price, and former PricewaterhouseCoopers Canada CEO William McFarland.

10 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 11 LOEWS NYSE: L

The Big-Picture Why This Business Works Why We Trust Leadership Opportunity You can think of Loews as a much Loews’ management team is largely Hotel stocks are getting hammered smaller version of Berkshire a family affair. The company is led with the coronavirus causing travel Hathaway [NYSE: BRK-B] — with by CEO James Tisch. His brother, and tourism to dwindle. Oil and gas a few twists. Both are insurance Andrew Tisch, and cousin, Jonathan stocks are also being shellacked as a companies at their core but also Tisch, serve as co-chairmen of result of reduced travel and the oil own other businesses and have Loews’ board of directors. Jonathan price war launched by Russia. significant stakes in other publicly Tisch is also CEO of the company’s Yet we’re recommending the traded companies. Loews Hotels subsidiary. The stock of a company that owns Loews owns an 89% stake in company was founded by Lawrence hotels, offshore drilling operations, commercial property and casualty Tisch, father of James and Andrew, and a natural gas pipeline business. insurer CNA Financial [NYSE: and his brother Robert Tisch, father Crazy? Not at all. CNA]. CNA’s business model is of Jonathan. While Loews [NYSE: L] does simple: charge enough in premiums This intertwining of the Tisch have all these businesses, it makes to cover the risk that it’s taking family with Loews makes the nearly three-quarters of its revenue with insurance policies and invest company’s success even more from property, casualty, and the profits. Its underwriting and important to James Tisch. And his specialty insurance. The company investing expertise has enabled the family still has plenty of skin in the also owns a packaging solutions business to steadily increase its game. James, Andrew, and Jonathan business. Insurance and packaging revenue and more than double its Tisch together own 14.2% of Loews’ might sound boring, but in this profits over the past four years. shares outstanding. kind of market, boring is beautiful. Each of Loews’ other businesses James Tisch joined Loews in Even better, Loews’ solid finan- individually generates less than 1977 and has led the company as cial position — largely derived from 9% of the company’s total revenue. CEO since 1999; he previously its insurance operations — should However, they provide diversifi- worked CNA Financial. Loews enable the company to absorb the cation across multiple industries bought a controlling interest in blows its at-risk businesses are and distinct long-term growth CNA in 1974. Tisch has led Loews taking right now. We think Loews opportunities. through two challenging periods: is in a great position to survive the the aftermath of 9/11 and the coronavirus-fueled market melt- financial crisis of 2008–09. His down and thrive when the market experience, steady hand, and life- rebounds. long ties to Loews give us confidence about his ability to guide the company to success in the future.

the motley fool ␲␰␲� downturn playbook 11 5-Year Stock Chart: Loews

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Why We Think Loews on the stocks that it buys during Many companies will face signif- Wins in a Downturn the coronavirus-related market icant financial challenges over the correction. next few months. Loews’ insurance The safest businesses during vola- What about afterward? The business gives it a safety net that tile times are those that have rock- global economy will rebound, most companies simply don’t have. solid balance sheets and strong, creating new opportunities for all Even better, it provides Loews cash steady cash flow. Loews checks of Loews’ businesses — hotels, off- to invest during what could be one both boxes. We especially like that shore drilling, natural gas pipelines, of the greatest opportunities to buy its insurance business generates packaging solutions, and insurance, stocks in a generation. the bulk of its revenue. Premium as well. Loews’ stock hasn’t been payments will come in monthly like immune to this market correction. clockwork. But as a result, its valuation is But one of the main reasons Why Loews Is Worth an now exceptionally attractive, with we think Loews will emerge from Investment Today shares trading at only 0.69 times the downturn as a winner is that the book value of the company. the company invests the profits Forget stock price volatility during Loews is the kind of business from its insurance business. We the current market uncertainty. that Warren Buffett’s mentor, Ben plan to buy great stocks on the Focus on the best businesses to Graham, would drool over. We see cheap — and so will Loews. When own. That’s what we’re doing. And this as a great time — to para- the market comes back (and it will), it’s why we think Loews is a smart phrase Buffett — to buy a wonder- Loews should earn sizable returns stock to buy right now. ful company at a wonderful price.

12 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 13 Key Info: Loews

About the company Financials

market cap $10.2 billion Net margin 6.2欥 dividend 0.75欥 3-year compound annual growth Sector Financials sales 4.4欥 IPO January 1978 earnings 6.8欥 Headquarters New York

Leadership

Tenure James Tisch has been CEO since 1999; he has been with Loews since 1977.

Ownership Key insiders own 14.2% of the company’s outstanding shares.

Compensation Top executives receive sizable salaries, but even more of their compensation is tied to incentives and stock that align them with shareholder CEO James Tisch interests.

Approval 72% of employees approve of Tisch on Glassdoor.

Culture & people

Satisfaction Employees give Loews 3.1 stars out of 5 on Glassdoor.

Board quality Loews’ board includes nine independent directors plus co-chairmen Andrew Tisch and Jonathan Tisch and CEO James Tisch. The independent directors have extensive experience in industries including insurance, oil and gas, and financial services and in academia. Lead director Paul Fribourg is CEO of Continental Grain, an international agribusiness and investment company, and has served on Loews’ board since 1997.

the motley fool ␲␰␲� downturn playbook 13 MARKEL NYSE: MKL

The Big-Picture two other components to the busi- Why We Trust Leadership Opportunity ness that set it apart from the rest. First is the company’s invest- Tom Gayner has been Markel’s Markel [NYSE: MKL] is an insur- ment portfolio. All insurers have co-CEO since 2016 and was the ance company, but you probably large investment portfolios. That’s company’s president and chief won’t use it to protect your home the primary way they make money. investment officer before taking or provide your life insurance. This However, unlike most others, which the helm. Richard Whitt is Markel’s company specializes in the unusual. stick to high-grade bonds, Markel other co-CEO, also since 2016, and Markel writes insurance policies invests a substantial portion of its was formerly president and chief on niche businesses and difficult- investment dollars in stocks. At the operating officer. to-assess risks. For example, one end of 2019, about 40% of Markel’s Gayner owns about $25 million of its subsidiaries insures collect- investment portfolio was made of worth of Markel stock, and Whitt ible cars and boats. If you need equity securities. has a $6 million ownership stake. to insure an art collection or a In addition to buying common Both have restricted stock units racehorse, Markel might have the stocks, Markel invests in a wide that could result in them owning solution. range of private businesses, includ- much more. All of the company’s ing farms, leather companies, and key executives get significant stock- much more, through its Markel based compensation. As a group, Why This Business Works Ventures segment, which has grown Markel’s executives and board into a large portion of the company. members own a total of more than In addition to its specialty insur- Nearly one-fourth of the company’s $300 million in stock. In short, if ance business, Markel also has a revenue in 2019 came from Markel delivers for its shareholders, substantial reinsurance operation. Ventures. the leaders stand to be handsomely If you aren’t familiar with the For this reason, Markel is rewarded. concept, think of reinsurance as often referred to as a smaller, insurance for insurance companies. earlier-stage version of Berkshire For example, a company that sells Hathaway [NYSE: BRK-B], and Why We Think Markel lots of homeowner’s insurance while we don’t necessarily think Wins in a Downturn might purchase a reinsurance Markel will grow into a half-trillion- policy to limit its maximum loss if a dollar empire, we certainly think First off, insurance isn’t a very natural disaster strikes. that’s a business model with tre- economically sensitive business. While insurance generates the mendous potential. People need to insure their bulk of Markel’s revenue, there are possessions even when times get

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tough, businesses still need liability companies invest nearly all of their Why Markel Is Worth an coverage, and insurance companies assets in high-grade bonds. When Investment Today still need to buy reinsurance. So we bond yields plunge — like they don’t foresee Markel’s insurance have recently — their investment It’s easy to see why insurance business suffering much in a reces- profitability takes a hit. Since stocks are getting hit hard in this sion or prolonged downturn. Markel invests in stocks and entire downturn. Not only are falling Additionally, Markel has a companies as part of its strategy, interest rates likely to result in history of excellent profitability falling rates have less of an effect. reduced investment income, but in its insurance business. Insurers Speaking of investments, there’s the coronavirus pandemic is likely generally try to roughly break even another big advantage that’s to result in greater-than-expected on underwriting — that is, pay important to know. At the end of insurance losses. out as much in claims as they take 2019, Markel had more than $3.1 However, Markel’s specialty in as premiums. Markel ran a 6% billion of cash and equivalents on insurance business shouldn’t be underwriting profit margin in 2019, its balance sheet — that’s more affected too badly by virus-related and this is before any investment than 20% of its entire market cap. losses, and its investment strategy income. The company has run an With the stock market plunging gives it a big advantage when it underwriting profit in eight of the into bear market territory, having comes to generating long-term past nine years, which is an excel- billions of dollars available to invest profits. And with several billion lent track record. is a great position to be in. dollars in cash on its balance sheet, Furthermore, Markel isn’t as we’re excited to see how Markel rate-sensitive as the rest of the could put it to work while stocks insurance industry. Most insurance are relatively cheap.

the motley fool ␲␰␲� downturn playbook 15 Key Info: Markel

About the company Financials

market cap $13.1 billion Net margin 18.8欥 dividend none 3-year compound annual growth Sector Financials sales 19.0欥 IPO December 1986 earnings 58.0欥 Headquarters Glen Allen, Virginia * net income includes unrealized investment gains

Leadership

Tenure Tom Gayner and Richard Whitt have been co-CEOs since 2016, and both have been key executives at Markel since 2010.

Ownership The board and key executives collectively own a little more than 2% of the stock.

Compensation All of Markel’s key executives receive significant stock-based compensation. Co-CEO Tom Gayner

Approval 68欥 of employees approve of Gayner and Whitt on Glassdoor.

Culture & people

Satisfaction Employees give Markel 3.2 stars out of 5 on Glassdoor, and 58欥 would recommend working at the company to a friend. Co-CEO Richard Whitt

Board quality In addition to both co-CEOs, Markel’s board includes former senior leaders of the company as well as executives from several other major companies.

16 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 17 BROOKFIELD PROPERTY REIT NASDAQ: BPYU

The Big-Picture Why This Business Works shareholder’s perspective, the only Opportunity major difference is that one is clas- Brookfield Property REIT has one sified as a REIT for tax purposes There’s a reason so many million- big characteristic distinguishing and the other is not. aires achieved that status by buying it from the rest of the REIT world. And the proof is in the numbers. and holding real estate: It’s a Most REITs invest in a single type Both stocks pay a $1.33 annualized relatively resilient and stable asset of property, such as apartment dividend, and the stocks move in class that has excellent long-term buildings or self-storage facilities. a virtually identical manner. In return potential. And while you Some own two or three types. fact, investors have the option probably can’t go out and buy an On paper, Brookfield Property to exchange their REIT shares office building or shopping mall REIT only owns a small portion of for shares in Brookfield Property yourself, there are ways for every- Brookfield’s real estate assets — its Partners on a 1-for-1 basis. day investors to get exposure to core retail portfolio that resulted Brookfield’s real estate opera- these assets, through real estate from the acquisition of General tion owns, operates, and develops investment trusts, or REITs. Growth Properties. However, all types of real estate, including A REIT is a special type of com- there’s much more to the story. office, retail, residential, industrial, pany that holds a portfolio of real Brookfield Property REIT is a hotels, self-storage, and student estate assets and passes most of its subsidiary of — and is controlled by housing. That includes: income through to shareholders. — Brookfield Property Partners ▶ 282 office properties in the U.S. REITs are required to pay out at [NASDAQ: BPY]. The shares of both and seven foreign markets least 90% of their taxable income stocks represent an equivalent eco- ▶ 168 retail locations, primarily to shareholders, and in exchange nomic interest in Brookfield’s real from GGP (the portfolio was for doing so, they aren’t taxed on estate portfolio and get the same more than 96% leased at the the corporate level. distributions. However, the REIT end of 2019 and had strong rent Brookfield Property REIT shares are intended to “provide an growth) [NASDAQ: BPYU] is a real estate economic return that is equivalent ▶ 40 residential properties with investment trust that we’re partic- to Brookfield Property Partners 58,000 apartments ularly excited about from a long- units,” meaning that shareholders’ ▶ 123 hospitality properties with term perspective, especially since return isn’t just dependent on more than 25,000 hotel rooms the market downturn has dramati- retail properties; you’re actually cally lowered its stock price. investing in Brookfield’s diversi- ▶ 68 logistics properties (ware- fied real estate portfolio. From a houses and distribution centers)

the motley fool ␲␰␲� downturn playbook 17 5-Year Stock Chart: Brookfield Property REIT

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Why We Trust Leadership Why We Think Brookfield make great candidates Brookfield Property for tax-advantaged retirement Brookfield Property Group (both accounts like IRAs. However, if you the REIT and non-REIT side of REIT Wins in a Downturn hold REITs in a standard, taxable the business) is led by CEO Brian brokerage account, it’s important to Kingston, who is also a managing Real estate tends to hold up realize that REIT dividends are gen- partner of Brookfield Asset nicely during tough times, and erally not entitled to the favorable Management. He’s been with the Brookfield’s focus on many types of “qualified dividend” tax treatment company since 2001 and was a real estate is its big stabilizing factor given to most stock dividends, board member of GGP before relative to other companies in the although they do qualify for the its acquisition by Brookfield. sector. In this downturn, hotel and 20% “pass-through” deduction that CFO Bryan Davis has been with retail REITs have been crushed, was part of the 2017 tax changes. Brookfield since 1999 and has while others, such as in self-storage, served in other executive roles have held up nicely. Brookfield’s within the company for years. diversified approach balances out Why Brookfield The company has historically the winning and losing property Property REIT Is Worth used significant stock-based types during a downturn and helps compensation for executives, achieve consistent income. an Investment Today although we don’t have salary infor- Speaking of income, Brookfield mation for the current leadership, generates a lot of it. As of March 13, Brookfield Property REIT gives who have only been in place since Brookfield’s yield is close to investors exposure to a massive and the GGP acquisition. double digits. The company aims to diversified portfolio of high-quality increase its distributions at a 5% to commercial real estate assets, 8% annualized pace and to generate which should weather the current a 12% to 15% return on equity over stock market and economic storm the long term. just fine. And at a newer, more Because of their relatively large attractive entry point for long-term income distributions, REITs like investors, it looks even better.

18 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 19 Key Info: Brookfield Property REIT

About the company Financials

market cap $750 million Net margin 43.0欥 dividend 9.3欥 3-year compound annual growth Sector Real estate sales n/a IPO August 2018 earnings n/a Headquarters New York

Leadership

Tenure Brian Kingston has been CEO since 2018 but has been with Brookfield Asset Management since 2001.

Ownership Brookfield Asset Management is overwhelmingly controlled by Brookfield Property Partners

Compensation Brookfield has historically done a great job of giving stock-based compensation and other CEO Brian Kingston benefits that align management’s interests with those of shareholders.

Approval 100% of employees approve of Kingston on Glassdoor.

Culture & people

Satisfaction Employees give Brookfield Property REIT 4.0 stars out of 5 on Glassdoor, and 73欥 would recommend working there to a friend.

Board quality Brookfield’s board includes several heavyweights in the investment world, including a managing partner from Brookfield Asset Management and the chairman of Sigma Real Estate Advisors.

the motley fool ␲␰␲� downturn playbook 19 HOWARD HUGHES NYSE: HHC

The Big-Picture to homebuilders, who construct business, and we love this decision. Opportunity residential neighborhoods. These The company is now focused on create demand for commercial doing what it does best and has Most publicly traded real estate properties (say, an office building, decades of growth runway ahead. stocks have some version of the shopping center, or a hotel) nearby, same business model: They either which Howard Hughes then builds build or acquire commercial real and leases to generate income. Why We Trust Leadership estate assets and then lease their The presence of these commer- properties to tenants to generate cial properties makes the surround- As part of its transition to focusing income. ing area more desirable and valuable, exclusively on its MPCs, Howard This can be an excellent way to so the company sells a little more Hughes has undergone a significant build wealth over time. However, land to homebuilders, and the cycle management changeover recently. one of the most unique real estate of value creation repeats over and CEO Paul Layne has only been companies in the market, Howard over for decades, until the entire in his role for a few months now Hughes [NYSE: HHC], does things in community is built out. but has more than three decades a very different way, and this could As a relatively mature example, of industry experience and was be an excellent place to put some consider the Woodlands MPC, previously the president of the money to work during a downturn. which is located just outside of company’s central region. Houston. The community is roughly The big reason we trust manage- 10 miles by 10 miles and has 28,475 ment is that the company’s com- Why This Business Works acres in all. About 118,000 people pensation structure has historically live there, and this population has done an excellent job of aligning Howard Hughes’ core business grown steadily since the Woodlands management’s interests with those is developing master-planned was formed in the mid-1970s. The of long-term investors. For example, communities, or MPCs. These are community has 31 schools, seven the company awarded restricted large-scale communities — some golf courses, tons of shopping and shares to its executive team that are the size of entire cities — that dining, and a big medical district. only vest if the company delivers have tons of amenities. MPCs Over the past few years, Howard an annualized total return of 11% or typically have their own schools, Hughes had gradually started to more for investors over a five-year shopping districts, and more. branch out into other commercial period and only fully vest with a Here’s the basic idea behind assets outside of its MPCs, but return rate of 15%. Plus, the CEO Howard Hughes’ business model. that’s changing. In late 2019, the is required to own stock worth at The company starts with a large company decided to sell virtually all least 10 times their base salary, and piece of undeveloped land — of its noncore assets and streamline other executives have ownership typically 10,000 acres or more. It its organizational structure in order requirements as well. then sells a small part of the land to focus exclusively on its MPC It’s worth noting that activist

20 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 21 5-Year Stock Chart: Howard Hughes

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investor Bill Ackman not only is operations, but it has an extremely long-term value growth of its land the chairman of Howard Hughes’ strong balance sheet and borrows is extremely likely. board but also has a massive stake in a responsible and sustainable Finally, consider the long-term in the company that recently got manner. value opportunity here. Howard bigger. After buying more stock Another edge Howard Hughes Hughes has estimated that it has in December 2019, Ackman (and has going into a downturn is that more than $4.5 billion in land to his firm) has a stake of nearly it has exclusive control over the sell (measured in 2019 dollars and 15%, including forward purchase supply of buildable land in its property values) in its core master- contracts. communities. In fact, this is one of planned communities. This is in the company’s biggest advantages addition to the company’s portfolio in both good times and bad — it of commercial real estate assets Why We Think essentially has a monopoly when and any other development activi- Howard Hughes Wins it comes to the supply of homes as ties. Howard Hughes’ entire market well as commercial assets in entire cap is about $3.4 billion, so it’s not in a Downturn cities. This allows the company to hard to see why Ackman and the create income and profit opportu- management team might believe Unlike most other real estate nities that other real estate busi- there’s tremendous long-term value companies, Howard Hughes has nesses simply cannot match. Its to be unlocked. a self-funding business model. average commercial development It funds the construction of its produces a 9.5% yield on cost and a properties through the money massive 25.5% return on equity, and Why Howard Hughes raised from its land sales, not from its cash flow from sales of buildable Is Worth an Investment dilutive equity offerings. In fact, land has increased by 35% in the Howard Hughes aims to reduce past two years alone. Today its outstanding share count over This allows the company to time, a sharp contrast to most insulate itself from downturns Howard Hughes is designed to be real estate investment trusts. The nicely. It isn’t forced to sell an extreme long-term investment. company uses some debt to fund its land at reduced valuations, and The company pays no dividend,

the motley fool ␲␰␲� downturn playbook 21 unlike most real estate companies, the potential of the company’s MPC long-term value creation in mind, preferring to reinvest all of its land, which is a primary reason even at the expense of short-term profits toward building out its leadership feels that the market profitability. That’s a business master-planned communities. doesn’t quite know how to value model we can get behind, especially Management acknowledges that this stock. And the team is com- at a gift of an entry price like we see it will take decades to fully realize mitted to making decisions with today.

Key Info: Howard Hughes

About the company Financials

market cap $3.4 billion Net margin 21.8欥 dividend none 3-year compound annual growth Sector Real estate sales 38.3欥 IPO November 2010 earnings n/a Headquarters Dallas Howard Hughes did not report funds from operations in 2016

Leadership

Tenure Paul Layne has been CEO since October 2019. Layne had previously been with the company as the president of the central region

Ownership Insiders collectively own about 20% of the company.

Compensation Howard Hughes directly ties a substantial portion of compensation to long-term shareholder CEO Paul Layne returns.

Approval Layne has not received enough reviews to generate an approval rating on Glassdoor.

Culture & people

Satisfaction Employees give Howard Hughes 3.4 stars out of 5 on Glassdoor.

Board quality In addition to activist investor Bill Ackman, Howard Hughes’ board has an impressive collection of real estate and business experience, including the CEO of CBRE’s New York region.

22 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 23 REDFIN NASDAQ: RDFN

The Big-Picture technology, and a salaried work- ▶ RedfinNow: Redfin buys the Opportunity force to keep its transaction costs home outright for a 7% fee. low. Redfin passes on a portion of ▶ Redfin Direct Offers: Buyers The internet has disrupted plenty the savings to consumers, charging can make an offer online of industries, but some have proved only a 1% to 1.5% fee to sell a home. without going through an agent. to be more resistant to change than That’s less than half the industry ▶ Redfin Direct Access: Buyers others. Consider the real estate norm. can see listings on Redfin market; buyers and sellers now But don’t let the low price fool without using an agent. have access to more information you; Redfin has the data to prove ▶ Redfin Premier: A luxury than ever before, but there’s still that its services make the entire property service for homes no easy way to transact online, and process better. Redfin-listed homes listed at more than $1 million 6% sales commissions are still the sell five days faster and for nearly that includes drone pictures, industry norm. $1,800 more than those listed premium brochures, interna- Redfin[NASDAQ: RDFN] wants by other brokers. This explains tional listings, and more. to change that. The company is on why customers return to Redfin a mission to “redefine real estate for future transactions at a much Redfin’s low-cost model and in the consumer’s favor.” By using higher rate than the industry aver- expanding portfolio of services technology and noncommissioned age and why the company boasts have helped drive extremely rapid brokers, Redfin speeds up the a net promoter score that is 18% growth. In 2015, Redfin’s revenue buying and selling process and higher than its competitors. was just $187 million. Last year, it saves sellers thousands of dollars Importantly, this model works topped $779 million. The company along the way. These benefits have out well for Redfin’s brokers, too. now serves customers in 94 allowed it to grow into the most Redfin’s commission-free agents markets in the U.S. and Canada and visited brokerage website in the U.S. are 3 times more productive than covers 78% of the U.S. population. With a differentiated business rivals and earn a median income model in place and billions of that is twice as high as that of dollars up for grabs, Redfin could their counterparts at competing Why We Trust Leadership be on the verge of finally disrupting businesses. the real estate market. Redfin is also constantly rolling CEO Glenn Kelman didn’t found out new services that are designed Redfin, but he’s still our kind of to make the transaction process leader. Kelman was a successful Why This Business Works better for all types of buyers and entrepreneur who, in 2005, sold sellers. Recent innovations include: a software company he founded Redfin helps people buy and sell ▶ Redfin Concierge: Redfin fixes for $200 million. After the sale, homes, but it’s far from a typical up a home for a 2.5% listing fee. he promised himself that his next real estate broker. Redfin makes project would have a deeper pur- use of nationwide scale, proprietary pose than just making money. That

the motley fool ␲␰␲� downturn playbook 23 5-Year Stock Chart: Redfin

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desire attracted him to Redfin’s consumers during boom times. Why Redfin Is Worth an mission of redefining real estate in But there’s a chance that the Investment Today the consumer’s favor. He joined the next few years won’t be as pros- company as CEO in 2005 and has perous for the real estate market. Just like almost every other stock, been at the helm ever since. There’s no telling what the health Redfin has been crushed by the Kelman currently owns about and economic fallout from con- recent downturn. The company’s 2% of Redfin’s stock, so he’s tinued spread of COVID-19 might stock was over $32 as recently as financially motivated to make the be, and it’s entirely possible that mid-February, but it is currently company a success. Kelman also a global recession might be under trading below $19. The rapid fall gets good reviews from employees. way. If a downturn is upon us, that has pulled the company’s price- Workers give him a 77% approval won’t be good for the real estate to-sales ratio down to just over 2, rating, and Redfin as a whole earns industry as a whole, but it might which is the lowest valuation that 3.5 stars out of 5 on Glassdoor. actually benefit Redfin. the company has fetched since it Consumers tend to look for went public in 2017. bargains when times are tough, and There’s no telling where this Why We Think Redfin that could make them more willing stock might head in the short term, Wins in a Downturn to give an unconventional broker but we believe that the company’s like Redfin a try. They might also be differentiated business model and The past few years have been good willing to sell their homes them- expanding list of services will help for the real estate markets, and selves, which is a need that Redfin it take market share in both good Redfin’s innovative platform and can accommodate. RedfinNow also times and bad, enabling investors expanding list of services have could become an attractive option to earn superior long-term returns. helped it to steadily capture market for people who need to make a Investors who buy today are share. In 2015, Redfin’s U.S. market sudden move due to the downturn. getting shares of a fast-growing share by value of homes sold was In other words, it’s possible that industry disruptor for a value price. just 0.44%, but by 2019 it jumped Redfin’s market share gains could We think that’s too good a bargain to 0.93%. That shows that Redfin’s accelerate in a global slowdown. to pass up. benefits are resonating with

24 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 25 Key Info: Redfin

About the company Financials

market cap $1.6 billion Net margin (3.3欥) dividend none 3-year compound annual growth Sector Real estate sales 43.0欥 IPO July 2017 earnings n/a Headquarters Seattle

Leadership

Tenure Glenn Kelman has been CEO since 2005.

Ownership Kelman owns 2% of the shares outstanding, and insiders overall hold about 8%

Compensation Management is paid in salary, bonus, and stock. Targets are based on metrics such as website visitors, revenue, net loss, and net promoter score. The CEO is required to own 6 times their CEO Glenn Kelman base salary in stock.

Approval 77% of employees approve of Kelman on Glassdoor.

Culture & people

Satisfaction Employees give Redfin 3.5 stars out of 5 on Glassdoor.

Board quality The chairman is the former CFO of Booking Holdings’ [NASDAQ: BKNG] Priceline Group, and other directors have experience at Deloitte, Stitch Fix [NASDAQ: SFIX], CarMax [NYSE: KMX], Yahoo, and SurveyMonkey [NASDAQ: SVMK].

the motley fool ␲␰␲� downturn playbook 25 WALKER ␦ DUNLOP NYSE: WD

The Big-Picture Why This Business Works billion in 2018 to $93.2 billion at the Opportunity end of 2019. Walker & Dunlop has established No matter where you are, you strong ties with key partners in always need a place to live. In real estate financing, working Why We Trust Leadership many real estate markets across closely with government-sponsored the country, multifamily proper- entities Fannie Mae [OTC: FNMA] Walker & Dunlop has been publicly ties — apartment complexes and and Freddie Mac [OTC: FRCC] as traded for just a decade, but its condominium developments — are well as the federal government’s business dates back to the 1930s, the most affordable way to live in Department of Housing and Urban when Oliver Walker and Laird desirable locations. As more people Development. Those relationships Dunlop founded the company that from rural areas have moved into have led to consistent growth, as bears their names. Willy Walker cities, the demand for housing Walker & Dunlop’s total revenue is Oliver’s grandson, and for the has risen. That’s created a lot of rose 13% in 2019, with loan origina- past 13 years, he’s been Walker interest from real estate developers tion fees rising 10% year over year. & Dunlop’s CEO. He’s taken an in multifamily projects, but in order Even with favorable conditions aggressive path toward expansion, to move forward with their plans, prevailing for the broader with the company making signif- they need to find financing. commercial real estate market, icant acquisitions and growing in Walker & Dunlop [NYSE: WD] those growth rates have been scope throughout his tenure as specializes in commercial real exceptional and have helped the chief executive. estate finance, offering builders company boost its market share. Walker has more than family exactly what they need to move for- Mortgage servicing also plays pride on the line in running Walker ward with lucrative developments. a key role in Walker & Dunlop’s & Dunlop. He currently owns about Walker & Dunlop is one of the big- success. Loan originations are one- a 4% stake in the company outright. gest players in the U.S. multifamily time events, but servicing revenue When you add in stock options home mortgage market. As more comes in on a recurring basis. That that he has the right to exercise, people look seriously at this niche provides Walker & Dunlop with a Walker’s potential stake rises to of the real estate market — and as reliable stream of income that has nearly 6%. A substantial portion of falling interest rates make financing added to the company’s overall the CEO’s current compensation is cheaper than ever — Walker & growth. In 2019, servicing fees linked to shareholder value through Dunlop has a huge opportunity to were 7%, and the 5% rise in the fair both restricted stock grants and build on its already strong reputa- value of mortgage servicing rights other incentives. tion. Moreover, with a huge busi- contributed further to the real Even though Walker & Dunlop ness in servicing mortgages, the estate financier’s top line. Walker is no longer privately held, Walker company has a diversified stream of & Dunlop’s servicing portfolio has still treats it like a family business revenue that serves it well through- also grown substantially over the from a work culture standpoint, out the real estate business cycle. years, including a jump from $85.7 and that shows up in his employees’

26 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 27 5-Year Stock Chart: Walker ␦ Dunlop

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dedication to the company. Walker That’s especially true for Walker & Why Walker & Dunlop & Dunlop gets favorable ratings Dunlop, because its loan origination Is Worth an Investment from workers as seen on Glassdoor, business and mortgage servicing and Walker gets an approval rating business complement each other Today of 92% in how his employees see well. him doing his job as CEO. The recent drop in interest rates Despite the advantages and defen- has many mortgage holders looking sive characteristics of its business, at potential refinancing. That could Walker & Dunlop’s stock has Why We Think provide a dual boost to Walker & suffered along with the rest of the Walker & Dunlop Wins Dunlop’s business, giving it the market, falling from nearly $80 per opportunity not only to take advan- share in mid-February to the low in a Downturn tage of one-time loan origination $50s. That puts a multiple of less fees from refinancing transactions than 10 times 2019 earnings on Real estate is a different asset but also to pick up new servicing Walker & Dunlop’s stock price. class than stocks and bonds, and business on those newly refinanced We don’t see any reason to although it’s not completely mortgages. think that demand for multifamily uncorrelated with movements in housing will fall in the long run, the stock market, it nevertheless and current weakness is likely only offers a different type of exposure. to push out would-be competitors and solidify Walker & Dunlop’s leadership position. That makes the real estate financier’s stock worth investing in even during a downturn.

the motley fool ␲␰␲� downturn playbook 27 Key Info: Walker ␦ Dunlop

About the company Financials

market cap $1.7 billion Net margin 21.2欥 dividend 2.7欥 3-year compound annual growth Sector Financials sales 12.0欥 IPO December 2010 earnings 15.1欥 Headquarters Bethesda, Maryland

Leadership

Tenure Willy Walker has been CEO since 2007.

Ownership Walker has a 4% stake in Walker & Dunlop, worth about $77 million. Exercisable stock options add to the CEO’s exposure to the stock.

Compensation More than three-quarters of Walker’s 2018 compensation of $4.1 million came from stock awards and non-equity incentive plan CEO Willy Walker compensation

Approval 92% of employees approve of Walker on Glassdoor.

Culture & people

Satisfaction Employees give Walker & Dunlop 3.8 stars out of 5 on Glassdoor.

Board quality Independent directors include former Fortress Investment Group managing director Michael Malone and former LinkedIn executive Ellen Levy, as well as professionals in the finance and real estate industries.

28 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 29 CHARLES SCHWAB NYSE: SCHW

The Big-Picture interest revenue. With a truly mas- and he’s ensured that the company Opportunity sive $4 trillion of client assets under stays true to its roots of providing management, Charles Schwab was valuable services at an extremely Since the founding of its predeces- able to safely invest $244 billion low cost to its vast customer base. sor, Charles Schwab & Co., nearly (out of which $213 million were Walter Bettinger was promoted 50 years ago, Charles Schwab customer bank deposits) in interest- from president of the company [NYSE: SCHW] has evolved into a bearing instruments last year. to CEO in 2008. Having guided leading financial services brand, The company earns a small the organization through the last offering a vast array of services, spread between its investment period of market tumult during including traditional brokerage and returns and the interest it pays on the years of the Great Recession, banking, mortgage lending, cutting- customer banking deposits. This Bettinger has focused on increasing edge financial planning, and spread, known as the net interest the breadth of Schwab’s services automated investing tools. With a margin, equated to a modest 2.41% while increasing its assets under rock-solid balance sheet and tre- in 2019. But a couple of percentage management. mendous competitive advantages points of net interest margin on over its brokerage competitors, we a few hundred billion dollars can believe Charles Schwab presents a generate immense returns: Schwab Why We Think compelling buy during the corona- took home a stunning $6.5 billion Charles Schwab Wins virus-related downturn. in net interest revenue in 2019. in a Downturn

Why This Business Works Why We Trust Leadership While the COVID-19 market downturn is hammering companies Charles Schwab’s discount broker- Schwab has a seasoned manage- of all stripes, Schwab should easily age arm has long acted as a funnel ment team in place that has guided weather the present drop. The to capture customers who often the company through periods company notably upended the avail themselves of its complemen- of exceptional growth and the entire brokerage industry last year tary services. Yet brokerage trading occasional rocky patch. Founder by cutting its already-low stock made up only 6% of Schwab’s $10.7 Charles R. Schwab has remained trading commissions to zero, billion in revenue in 2019. chairman of the company since forcing nearly every discount Schwab generates much more its start and has also served as a competitor — and many full- business in investment advisory director of Charles Schwab since service brokers — to follow suit. and management activities than in 1986. His vision to provide discount This action might have harmed brokering — it pulled in $3.2 billion brokerage commissions to ordinary smaller competitors that, unlike in asset management and adminis- retail investors has disrupted the Schwab, rely on trading commis- tration fees last year. But Schwab’s business models of industry behe- sions to turn a profit. But it had a biggest moneymaker by far is its net moths over a period of decades, negligible effect on the company’s

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profits. And after it famously pending $26 billion, all-stock Why Charles Schwab dispensed with commissions, acquisition of competitor TD Is Worth an Investment Schwab reaped a windfall in new Ameritrade [NASDAQ: AMTD]. customer accounts. The company Scheduled to close this year, this Today reported an increase of $212 billion transaction will add another $1.3 in net new assets last year, with $66 trillion to Schwab’s already vast We won’t sugarcoat this: It’s a billion pouring in during the fourth AUM and give it access to TD frightening time in the markets. Yet quarter after its commissions Ameritrade’s customers’ bank and patient investors who invest now announcement. money market accounts. in sound companies with sterling Despite the sudden bear market, One potential boost to future competitive advantages — such as any curtailing of trading volume profits is out of the company’s Charles Schwab — should generate really won’t affect the company’s control. In recent years, interest outsize returns over a five- to bottom line. In fact, if more rates have fallen steadily — and 10-year period. Investors tend to customers temporarily move cash to increasingly so in the past few flee the stocks of brokers in market the sidelines, Schwab’s net interest weeks. But despite a prolonged sell-offs, but as we’ve seen, Schwab income should see a slight boost. period of relatively low interest isn’t your typical brokerage, though Over a longer horizon, Schwab rates, history tells us that rates are its stock has declined alongside is set to sharpen its competitive indeed cyclical. Mid- and long-term then. With no long-term net advantage over rivals. It’s aggres- interest rates such as yield on the debt on its books, and a forward sively increasing its assets under 10-year U.S. Treasury note won’t price-to-earnings ratio of just 11.5, management, which will bulk up remain below 1% forever. When Charles Schwab is a persuasive customer banking deposits and interest rates begin to climb again, long-term play. generate ever-higher net interest Schwab should be able to enhance income. A telling example of its net interest margin and thus add Schwab’s overall strategy is its handsomely to its net earnings.

30 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 31 Key Info: Charles Schwab

About the company Financials

market cap $40.3 billion Net margin 34.5欥 dividend 2.3欥 3-year compound annual growth Sector Financials sales 12.8欥 IPO September 1987 earnings 25.2欥 Headquarters San Francisco

Leadership

Tenure Walter Bettinger has been CEO since 2008.

Ownership Insiders, including Bettinger and Chairman Charles R. Schwab, own about 10.5% of the shares outstanding.

Compensation In addition to annual salaries, executives receive cash and long-term stock incentives for achieving performance-based metrics, chiefly growth in CEO Walter Bettinger earnings per share.

Approval 87% of employees approve of Bettinger on Glassdoor, where we was ranked as one of the “Top CEOs” in 2019.

Culture & people

Satisfaction Employees give Charles Schwab 3.6 stars out of 5 on Glassdoor.

Board quality Schwab’s board has experience throughout financial services industry, including Mark Goldfarb, a managing partner of consulting and accounting firm BDO, and Joan Dea, founder of private investment consulting firm Beckwith Investments.

the motley fool ␲␰␲� downturn playbook 31 DISCOVER FINANCIAL SERVICES NYSE: DFS

The Big-Picture payment network provider. Having amounted to more than $3 billion Opportunity fought against network giants in 2019, and even after considering Mastercard [NYSE: MA] and the substantial cash-back rewards Traditionally, the credit card Visa [NYSE: V] and won, Discover that Discover pays to entice its business relied on two completely became an independent publicly customers into choosing its card separate sets of companies to work. traded company in 2007, and it rather than those that its rivals Credit card issuers were banks that has remained a major player in the issue, net sales from that part of wanted to lend to cardholders and payment space ever since. the business added $1.07 billion to were willing to accept relatively the company’s top line. Importantly, high default rates in exchange for that interchange revenue — along the high interest rates they were Why This Business Works with other noninterest income able to charge. Meanwhile, card like loan fees, protection product network companies provided the Discover gets the lion’s share sales, and revenue from transaction payment processing and back-room of its revenue from net interest processing — isn’t subject to credit work involved in making sure income, representing the difference risk and therefore doesn’t need that money got from banks to between the interest it receives loan loss provisions to protect it. merchants — in exchange for a fee. in cardholder finance charges and Issuers took all the credit risk but other borrowers and the interest it got potentially big rewards from pays to customers of its consumer Why We Trust Leadership net interest income, while payment banking business. In 2019, net processors relied solely on fee- interest income represented almost Roger Hochschild is relatively based revenue. five-sixths of Discover’s overall new to the role of chief executive Discover Financial Services sales, and at $9.46 billion, it was officer, but he’s no newcomer to [NYSE: DFS] set out to change that. up 8% from 2018. Its net interest Discover Financial. Hochschild was When Sears first launched the margin of 10.41% was far higher the company’s COO from 2004 to Discover card in the mid-1980s, it than most banking institutions 2018 and had other executive roles broke new ground for the industry, can claim, pointing to the lucrative with Discover when it was part of offering cash back to cardholders nature of the credit card business Wall Street financial giantMorgan and charging no annual fee. during strong economic times. Stanley [NYSE: MS]. Having worked Discover also set out to process Yet Discover also gets important under former CEO David Nelms its own transactions, taking on revenue from running its own pay- for a long time, Hochschild brings the dual role of card issuer and ment network. Interchange revenue the same priorities to Discover’s

32 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 33 5-Year Stock Chart: Discover Financial Services

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business: managing credit risk Why We Think Discover Why Discover Financial while sticking with a lending- Financial services Wins services Is Worth an centered business model and developing unique benefits from its in a Downturn Investment Today proprietary payment network. Hochschild’s approach The main concern that most Discover Financial Services’ stock combines business savvy with investors have with Discover has lost half its value since last sensitivity to customer needs. In Financial Services is that a reces- summer, but its earnings have promoting greater global accep- sion could bring with it higher remained strong. With the stock tance of Discover cards, the CEO delinquency rates from its bor- at around $48 and projections has helped further key partner- rowers. Discover has indeed had suggesting that Discover should be ships, including the Diners Club upticks in credit card delinquencies, able to match or exceed the $9 per International card brand and although improvement in its share in earnings that it brought in China’s UnionPay card processing personal loan delinquencies during 2019, it’s hard to find a more company. Along the way, Discover reflected the company’s efforts to attractive company on a valuation has focused on promoting its tighten its credit standards. basis. customer service, seeking to set Yet the value of Discover’s We think that Discover’s itself apart in a highly competitive extremely high net interest margin inexpensive stock price justifies the industry in which many of its rivals is that it provides a significant risks from uncertainty surrounding have to pay up for card perks to margin of safety. Even if credit­ the impact of the coronavirus keep their cardholders happy. worthiness in the overall popu- outbreak on consumer spending lation starts to fall, there’s still patterns. Having successfully plenty of room for Discover to weathered the financial crisis profit from its credit card custom- in 2008 and 2009, Discover has ers. International expansion also shown that it has what it takes to has the potential to add to growth get through adversity and emerge even in a challenging domestic stronger than ever. environment.

the motley fool ␲␰␲� downturn playbook 33 Key Info: Discover Financial Services

About the company Financials

market cap $15.0 billion Net margin 35.9欥 dividend 3.3欥 3-year compound annual growth Sector Consumer finance sales 9.4欥 IPO June 2007 earnings 16.3欥 Headquarters Riverwoods, Illinois

Leadership

Tenure Roger Hochschild has been CEO since 2018.

Ownership Hochschild owns shares of Discover worth nearly $44 million.

Compensation Hochschild received compensation of $5.7 million in 2018, $4.8 million of which came in the form of stock awards and nonequity incentive plan compensation. CEO Roger Hochschild

Approval 84% of employees approve of Hochschild on Glassdoor.

Culture & people

Satisfaction Employees give Discover 3.7 stars out of 5 on Glassdoor.

Board quality Independent directors include Aon [NYSE: AON] CEO Greg Case, former SEC commissioner Cynthia Glassman, former Unisys [NYSE: UIS] CEO Lawrence Weinbach, and former Fannie Mae [OTC: FNMA] executive Mary Bush.

34 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 35 MERCADOLIBRE NASDAQ: MELI

The Big-Picture of e-commerce and payments mobile point-of-sale devices. Opportunity solutions. This includes an online Consumers can store funds marketplace through which mer- in their mobile wallet app or use There’s little doubt that the trend chants can sell products, process prepaid cards to make transactions. toward e-commerce will only payments, and arrange shipping. They can also transfer money to continue to grow. Over the past The company also provides work- peers, similar to services offered by decade, e-commerce has risen from ing capital loans, logistics, ware- PayPal’s Venmo. The beauty of its about 4% of U.S. retail sales to 11%, housing, and cross-docking services. business is that MercadoLibre gets with no signs of slowing. Yet while This makes it a one-stop shop for a cut of every purchase and every online sales are part of everyday life vendors looking to sell online. payment transaction that passes here at home, some countries are That’s not all. The company’s through its gateway. only just beginning to adopt digital payment solution, Mercado Its recent results are a testa- e-commerce and the digital Pago, was originally inspired by ment to the company’s strategy. In payments that help facilitate it. PayPal [NASDAQ: PYPL] and devel- the fourth quarter, total payment E-commerce transactions make oped to address a customer need in volume rose 99% year over year in up only about 4% of retail sales a largely cash-based society. local currencies, while off- in Latin America, yet the region It’s estimated that 70% of the marketplace TPV climbed 176% and is among the fastest-growing population in Latin America doesn’t now accounts for the majority of e-commerce markets in the world, have a bank account, and only 20% Mercado Pago’s payments growth. suggesting a massive opportunity to 55% has a credit card, depending The number of payment transac- as adoption grows in the region. on the country. MercadoLibre tions also soared, increasing 127% That’s where MercadoLibre developed a network of conve- year over year — the third consec- [NASDAQ: MELI] comes in. The nience stores and other locations utive quarter of triple-digit growth. company is the largest e-commerce where consumers can add cash to This all contributed to a revenue platform in Latin America in terms their Mercado Pago account. The jump of 84% in local currency, of unique visitors and page views, funds could then be used not only driven primarily by soaring demand providing its users with a complete on its platform but also to pay utili- for its payments business. portfolio of digital commerce and ties and top off mobile phone plans, This adds to MercadoLibre’s payment services — but it’s the among other things. already solid growth. The company payments opportunity that’s partic- Mercado Pago then expanded to has been increasing its user base — ularly intriguing. other online retailers and is now a currently at nearly 321 million — by commonplace payment method on 20% year over year in each and every websites — even those not associ- quarter going back nearly a decade. Why This Business Works ated with MercadoLibre. Better still, Investors might initially be the service became so popular that concerned about MercadoLibre’s MercadoLibre provides buyers and it expanded to a growing number lack of profits, but the company has sellers with a complete ecosystem of brick-and-mortar stores through been investing heavily to get the

the motley fool ␲␰␲� downturn playbook 35 5-Year Stock Chart: MercadoLibre

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word out and expand its business even as many businesses were websites and going into stores to and should return to profitability in hunkering down and hoarding cash, make purchases, and a growing the coming quarters. MercadoLibre embarked on an number of them will use Mercado aggressive overhaul of its platform, Pago to pay for the transactions. improving both the merchant and PayPal was so intrigued by Why We Trust Leadership customer experience and reaping the potential of Mercado Pago’s the benefits for years to come. payments business that early last MercadoLibre’s leaders have shown Finally, MercadoLibre is still year, it took an equity stake of $750 time and again that they have led by its founder, CEO Marcos million in MercadoLibre. The two what it takes to navigate the often Galperin, who developed the recently expanded their partner- stormy geopolitical and economic business plan as an MBA candidate ship, and PayPal will be a payment conditions in Latin America. The at Stanford University. Given his method on Mercado Pago’s online company has endured currency considerable stake in the company, checkout in Brazil and Mexico, giv- devaluation in Venezuela, political his interests are well-aligned with ing PayPal’s 300 million customers scandals in Brazil, and hyperinfla- shareholders. access to the market. Conversely, tion in Argentina — and that’s just Mercado Pago will be a payment in the past decade. During the same option at PayPal’s 24 million mer- period, MercadoLibre expanded Why We Think chants around the world. The sheer its business, increasing revenue MercadoLibre Wins scale this agreement brings will by more than 1,200% — while the increase MercadoLibre’s margin of stock rose 1,000%. in a Downturn safety while it continues to bring Another reason to trust new users into its ecosystem. MercadoLibre’s management is As the coronavirus downturn has Even if the economy slips into its record of focusing on long- hit, seemingly no stock has been recession, MercadoLibre is posi- term issues rather than meeting immune, yet MercadoLibre’s under- tioned to weather the storm, with arbitrary quarterly estimates. For lying business is solid and will go $3.1 billion in cash on its balance example, after the 2009 recession, on. Customers will still be visiting sheet and just $810 million in debt.

36 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 37 Why MercadoLibre Is This isn’t because investors sud- sheet, and the scale necessary to Worth an Investment denly turned sour on the opportu- weather the downturn. It’s also nities in Latin America, the trend considerably cheaper than it was Today of e-commerce, or the growing just a month ago, giving investors relevance of its payments business. the opportunity to buy this Latin Despite MercadoLibre being the MercadoLibre has simply fallen in American e-commerce and fintech definition of a business firing on tandem with the rest of the market. powerhouse at a steep discount. all cylinders, the stock has been The company has a resilient battered with the rest of the market. business, a rock-solid balance

Key Info: MercadoLibre

About the company Financials

market cap $26.6 billion Net margin n/a dividend none 3-year compound annual growth Sector Consumer cyclical sales 40.0欥 IPO August 2007 Earnings n/a Headquarters Buenos Aires, Argentina

Leadership

Tenure Marcos Galperin has been CEO since he founded the company in 1999.

Ownership Galperin controls 8.1% of the company via a trust.

Compensation A significant portion of executive compensation is tied to both operational and financial performance objectives and paid over a period of years. CEO Marcos Galperin Approval 94% of employees approve of Galperin on Glassdoor.

Culture & people

Satisfaction Employees give MercadoLibre 4.2 stars out of 5 on Glassdoor.

Board quality Board members include Alejandro Aguzin, chairman and CEO of J.P. Morgan Asia Pacific; Roberto Sallouti, CEO of Banco BTG Pactual, the largest investment bank in Latin America; and Meyer Rais, managing partner at fintech VC fund Ribbit Capital.

the motley fool ␲␰␲� downturn playbook 37 WESTERN ALLIANCE BANCORPORATION NYSE: WAL

The Big-Picture Arizona, Nevada, and California. Western Alliance’s four regional Opportunity With state and local economies segments — Arizona, Nevada, remaining strong in the West, Southern California, and Northern Many investors in the financial Western Alliance is in the perfect California — totaled $296 million. industry focus on the biggest place to achieve its goals and build Total loans there came in at $9.6 banks in the business. These giant up its business further in the years billion, with deposits totaling $14.7 institutions have global scope, and to come. billion. Net income rose about 14% they tend to prosper or struggle from 2018, with loans increasing by based on broad macroeconomic about $600 million and deposits conditions not only across the Why This Business Works jumping almost $1.4 billion. United States but around the Western Alliance also offers spe- world. It’s therefore easy to forget Western Alliance embraces cialty lines of banking business on a that at its base, banking is a highly old-fashioned banking, offering broader basis that is less reliant on localized business that relies on the checking, savings, and money- geography. Among the bank’s target economic prosperity of the specific market accounts to depositors areas are services for homeowners’ geographies financial institutions along with certificates of deposit associations, financing for hotel serve. That’s much clearer when to raise capital. It then lends that franchisees, public and nonprofit you look beyond too-big-to-fail money out, largely to commercial finance, and lending to foster leaders, to some of the smaller customers for equipment pur- technology and innovation. These regional banks that are more chases, real estate development, specialized services give Western closely tied to their communities. construction, and working capital. Alliance the ability to stand out Western Alliance Western Alliance also provides typi- from bigger banks that lack these Bancorporation [NYSE: WAL] is cal local banking services, including in-house niche capabilities, and a mid-sized regional bank with credit and debit cards, currency they also open up cross-selling about $27 billion in assets. That’s exchange, and transaction-based opportunities that can bring in tiny compared with the trillions treasury services. That’s been an new customers to the traditional you’ll find at the country’s largest especially valuable business in banking side of Western Alliance’s financial institutions, but Western its three core states, where rising business. Outstanding loans in Alliance has ambitious aspirations populations and business growth these specialty lines added up to for growth. Based in Phoenix, the have helped local economies do $11.4 billion at the end of 2019, up regional bank serves fast-growing well. In 2019, net income from dramatically from $8.5 billion in

38 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 39 5-Year Stock Chart: Western Alliance Bancorporation

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2018, and these areas added another a family of bankers and founded his placed than many of its peers to $206 million to the bank’s bottom first bank when he was just 23 years weather the storm. Net charge-offs line. These earnings were up by old. Sarver helped lead Western amounted to just 0.02% of loans in nearly a third from 2018. Alliance forward through numerous 2019, and nonperforming loans are acquisitions of assets and other still at an attractively low 0.26%. To banking institutions, and his guid- have maintained this level of credit Why We Trust Leadership ance will be invaluable in helping quality while increasing loans Vecchione stay on the right path. and deposits by 19% over the past CEO Ken Vecchione has only been year speaks to Western Alliance’s in his current position for a few competitive advantage. years, but he has a long history with Why We Think Western Alliance. He was the bank’s Western Alliance chief operating officer from 2010 Why Western Alliance Wins in a Downturn to 2013, then left to serve as CEO Is Worth an Investment of debt-purchasing and collection company Encore Capital Group Western Alliance’s stock has lost Today [NASDAQ: ECPG] before coming back almost half its value since mid- to Western Alliance in 2017. As part February. We believe that the out- Western Alliance has traditionally of a transition plan, Vecchione took sized decline stems from a couple traded at a substantial premium over the CEO role in 2018. of factors: the fear that an economic to its book value, but the recent However, we’re even more slowdown in the Western U.S. will decline has brought the stock pleased that long-time former be more dramatic than elsewhere price down almost to match the CEO Robert Sarver has stayed on and that specialty lines like hotel $29.42-per-share book value at as executive chairman of Western finance will get hit especially hard. year-end. We think that makes now Alliance’s board of directors. Sarver Yet Western Alliance has done a a great time to build a position in is probably best known for his good job of maintaining credit qual- this strong and growing financial ownership of the NBA’s Phoenix ity, and even if the economy does institution at a bargain price of less Suns franchise, but he comes from enter a recession, it will be better than 7 times its 2019 earnings.

the motley fool ␲␰␲� downturn playbook 39 Key Info: Western Alliance Bancorporation

About the company Financials

market cap $3.2 billion Net margin 45.9欥 dividend 3.1欥 3-year compound annual growth Sector Financials sales 16.2欥 IPO July 2005 Earnings 24.6欥 Headquarters Phoenix

Leadership

Tenure Ken Vecchione has been CEO since 2018.

Ownership Vecchione owns about $10 million worth of Western Alliance stock. Executive chairman and former CEO Robert Sarver has a nearly 1% stake in the bank, worth about $30 million.

Compensation Vecchione received about $4.8 million in total compensation in 2018; $3.7 million of that came CEO Ken Vecchione from stock awards and nonequity incentive plan compensation. A similar percentage of Sarver’s compensation came from performance-linked pay.

Approval 52% of employees approve of Vecchione on Glassdoor.

Culture & people

Satisfaction Employees give Western Alliance 3.0 stars out of 5 on Glassdoor.

Board quality Independent directors include Meritage Homes [NYSE: MTH] CEO and co-founder Steven Hilton, former eBay [NASDAQ: EBAY] executive Adriane McFetridge, and director emeritus and Boyd Gaming [NYSE: BYD] founder William S. Boyd.

40 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 41 BROOKFIELD INFRASTRUCTURE NYSE: BIP

The Big-Picture Why This Business Works new investment that Brookfield Opportunity Infrastructure put to work in those Brookfield Infrastructure has put areas, including the acquisition of Investors love exciting businesses together an impressive collection of energy businesses in the U.S. and a in high-growth sectors like technol- infrastructure assets across several natural gas pipeline in India, along ogy and biotech, where a disruptive important categories, and they all with significant telecommunications upstart can come out of nowhere produce solid financial performance. infrastructure projects in France, to become a leader in a promising In 2019, funds from operations — a Brazil, the U.S., Australia, and New new niche space. It’s a lot harder better measure of profitability for Zealand. Because long-term debt for most investors to get interested asset-heavy businesses in which has been available at low rates, in boring businesses. Yet when depreciation charges distort net Brookfield Infrastructure has had downturns hit, it’s often these income — rose 12% from the year the capacity to pursue acquisition steady, reliable, and quietly before. Brookfield Infrastructure’s targets while also restructuring its successful companies that stand utility business had flat FFO despite balance sheet at favorable terms. out and outperform their more selling some of its Chilean-based exciting counterparts. electric transmission assets, and the Brookfield Infrastructure transportation business had a mod- Why We Trust Leadership Partners [NYSE: BIP] specializes est 2% rise in FFO on the strength in operating infrastructure assets of port, toll road, and railroad- CEO Sam Pollock has done a good around the world. These assets related activity. This stability shows job following a simple but effective include things like water utility dis- the value of the balanced approach strategy to maximize returns for tribution systems, energy transmis- that has helped the company con- Brookfield Infrastructure. With sion equipment and pipelines, ship- centrate on getting the most out of his team of analysts, Pollock has ping ports, toll roads, and similar its infrastructure assets regardless found high-quality infrastructure networks that are necessary to get of the particular industry they serve. assets at attractive prices, actively energy, water, passengers, freight, Yet Brookfield Infrastructure is managed those assets in order to and information where they need to never content to stop looking for maximize their profitability, and go. No matter what happens to the new opportunities. The company then sought to sell off improved global economy, people aren’t going made strong growth in energy and assets when market conditions can to stop needing the essential things data infrastructure, with FFO rising give Brookfield Infrastructure the that Brookfield Infrastructure helps 53% and 75%. Those gains stemmed biggest payoff from the proceeds deliver to them. largely from the $2.6 billion in of their sale. That then frees up

the motley fool ␲␰␲� downturn playbook 41 5-YEAR STOCK CHARt: Brookfield Infrastructure

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capital for the company to use in special note for investors future acquisitions, building a posi- tive feedback loop for success. Brookfield is in the process of creating a new entity, Brookfield Brookfield Infrastructure gives Infrastructure Corp. [nyse: bipc], that will be a corporation instead Pollock and his executive team of a partnership but otherwise will be economically equivalent to BIP. plenty of incentive to make the Investors who buy BIP before March 31 will receive 1 share of BIPC for every 9 units of BIP they buy. After March 31, BIP and BIPC will trade company do well. With a combina- separately but should have similar prices. The advantage of BIPC over tion of different types of equity- BIP is that BIPC shareholders won’t have to deal with K-1s at tax time. linked compensation, Pollock has Instead, dividends will get reflected on 1099s like most companies. about $225 million in value on restricted and deferred stock units and escrowed shares. That makes company doesn’t have any exposure Why Brookfield up for a general lack of regular to China, and the CEO is optimistic Infrastructure Is Worth shareholdings among insiders. that if the financial effects from the outbreak are short term in nature, it an Investment Today won’t have any material impact on Why We Think Brookfield Brookfield Infrastructure. Even with this upbeat outlook, Infrastructure Wins in a Meanwhile, the infrastructure Brookfield Infrastructure’s stock specialist is looking to put new has lost more than a quarter of its Downturn capital to work, with $1.5 billion value since mid-February. We don’t to $2 billion in proceeds expected think that makes sense, given that Brookfield Infrastructure isn’t from asset sales that it will use for we expect little or no disruption to immune to hiccups in global growth, further investments. Combine that its core operations. Add to that a and Pollock noted in the latest with organic growth expectations recent increase in its dividend, and shareholder letter that the corona­ of 6% to 9% for its existing assets, Brookfield Infrastructure has the virus outbreak has introduced and Brookfield Infrastructure is potential to keep delivering reliable new disruptions that could stifle optimistic that it can achieve 12% income and stock gains. expansion in certain areas. Yet the to 15% gains in FFO for 2020.

42 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 43 Key Info: Brookfield Infrastructure

About the company Financials

market cap $12.3 billion Net margin 0.8欥 dividend 5.8欥 3-year compound annual growth Sector Utilities sales 46.1欥 IPO January 2008 funds from operations 7.7欥 Headquarters Hamilton, Bermuda

Leadership

Tenure Sam Pollock has been CEO since 2008.

Ownership Pollock’s vested and unvested equity interests in Brookfield Infrastructure add up to about $225 million, as of the end of 2019.

Compensation Pollock received about $3.8 million in total compensation in 2019, with the bulk coming in the form of escrowed stock and deferred share units. CEO Sam Pollock

Approval Brookfield Infrastructure doesn’t have a separate CEO rating on Glassdoor

Culture & people

Satisfaction Brookfield Infrastructure doesn’t have a separate Glassdoor rating, but parent Brookfield Asset Management gets 3.9 stars out of 5.

Board quality Independent directors include former McDermott International [OTC: MDRIQ] CEO John Fees, utility financial analyst Anne Schaumburg, and former mining executive Daniel Muniz Quintanilla.

the motley fool ␲␰␲� downturn playbook 43 Disclosures Buck Hartzell owns shares of Berkshire Hathaway (B shares), Booking Holdings, Brookfield Asset Management, Brookfield Infrastructure Partners, Brookfield Property REIT, CarMax, Charles Schwab, CNA Financial, Discover Financial Services, Fairfax Financial, Loews, Markel, MercadoLibre, PayPal Holdings, Redfin, Howard Hughes, Walker & Dunlop, and Western Alliance Bancorp.

The Motley Fool owns shares of Berkshire Hathaway (B shares), Booking Holdings, Brookfield Asset Management, Markel, Mastercard, MercadoLibre, PayPal Holdings, Redfin, Stitch Fix, Howard Hughes, Visa, and Walker & Dunlop.

The Motley Fool has a disclosure policy.

Data as of March 13, 2020.

44 the motley fool ␲␰␲␰ downturn playbook the motley fool ␲␰␲� downturn playbook 45 the motley fool ␲␰␲� downturn playbook 45 2020 Downturn Playbook