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There are a number of items you look for when trying to determine if a company is undervalued. One item is hidden assets. As the name implies, assets can be either overstated or understated on the firm’s balance sheet. Which is turn can overstate or understate the value of the firm itself. When assets are hidden or undervalued, true worth is understated. This is where you get the greatest asset plays.
Companies that own natural resources such as land, timber, oil, or precious metals carry those assets on their books at a fraction of the true value. For instance, in 1987, Handy and Harman, a manufacture of precious metals products, had a book value of $7.83 per share, including its rather large inventories of gold, silver, and platinum. But these inventories are carried on the books at the prices Handy and Harman originally paid for the metals and that could have been thirty years ago. At today’s prices ($6.40 an ounce for silver and $415 for gold) the metals are worth over $19 per share.
With Handy and Harman stock selling for around $17 per share, less than the value of the metals alone, is this a good asset play? Our friend Buffet thought so. He’s held a large position in Handy and Harman for several years, but the stock hasn’t gone anywhere, the company’s earnings are spotty and the diversification program hasn’t been a rousing success, either.
Recently it was announced that Buffett is cutting back his interest in the company. So far Handy and Harman looks like the only bad investment he’s ever made, in spite of its hidden asset potential. But, if gold and silver prices rise dramatically, so will this stock.
Other examples include but are not limited to brand names such as Coca-Cola or Robitussin that have tremendous value that isn’t reflected on the books. So do patented drugs, cable franchises, TV and radio stations – all carried at original cost, then depreciated until they too disappear from the asset side of the balance sheet.
Hidden assets can be found in the subsidiary business owned wholly or in part by a large parent company. You might find hidden assets when one company owns shares of a separate company, when tax breaks create hidden assets. Because of its tax-loss carry forward then firms come out of bankruptcy in a turnaround story.
This is primarily sourced from Peter Lynch’s book entitled “One up on Wall Street” published in 1989.
Hidden assets may be found in various situations. The key to finding them is through security analysis and looking where the masses do not. Contact us today, to learn more about how we find undervalued stocks.
At Port Wren Capital, LLC, we specialize in picking specific undervalued U.S. stocks using fundamental analysis developed by Benjamin Graham using a five step process. We have beaten the S&P500, DJIA and NASDAQ benchmarks since we started 5 years ago on our own investments. Discover the difference for yourself. To learn more contact us today.
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