Trying to identify companies that have hidden assets that are overlooked is beneficial because those stocks trade cheaper meaning you can get more reward by investing in them.
Does the Company Have Any Hidden Assets That Have Been Overlooked by Wall Street?
Sometimes, Wall Street does not recognize the value of those reserves and it misprices the securities. For those situations, you need to use the opportunity to buy the securities at discount prices. Established brand names are another form of hidden assets. Another form of hidden assets is real estate. When the land value appreciates over time, on balance sheet, those real estate investments might already been written off.
Does the Company Have a Low Percentage of Net Receivables?
The money owed to a company be customers is referred to as receivable. Net receivable means total receivables minus bad debt. If the company is in a sustainable competitive position, it should have fewer net receivables as a percentage of revenue because it can collect the receivables from the customers faster. On the other hand, if the company is in a competitive business, it can give more time to the customer to pay back the receivables in order to keep the customers happy.
If you see a high amount of net receivables as a percentage of the revenue, try to examine that company’s situation carefully. If you see a sudden increase in receivables, that is a problem because the company’s products may not be in great demand. The company needs to give more to dealers or distributors to pay back their invoices in order to stock their products.
Another thing you need to calculate is the rate of net-receivable growth compared to sales growth.
Does the Company Have More Pension Assets than Vested Benefits?
Certain companies provide pension and health benefits to their former employees after their service with the company. These kinds of benefits improve the loyalty and retention of existing employees, which is great for the employees but not for the shareholders.
Nowadays tech companies and other service industries do not provide pension benefits. That is why their liabilities are less. Make sure the pension assets are higher than the vested benefits. When the company’s pension assets are less than the vested benefits, the company needs to pay that difference which is a pure liability for the company.
Are Any Large Shareholders or Raiders Working to Uncover the Value of the Under Valued Asset Plays?
When you are looking at asset plays, there may be hidden assets in the company, but the market may value the business less than it is actually worth. The market might not be able to identify the hidden asset or assets that you identified. If you get into those asset plays, you might not be able to reap the benefits, because the market may take years to reflect the true value of the company.
Suppose a large shareholder or raider is working to uncover the value of the company, this can be a good thing. The shareholder or raider may engage in a legal battle or takeover war with the company. The board and management are pressured to act in order to unlock the value of the company. When that happens, as a fellow shareholder you can reap the benefits sooner and use the money to invest in other under-valued opportunities.