Patient, experienced investors look for stocks carrying hidden assets that are not reflected on the balance sheet but can lead to enormous gains once the company begins to profit from them. At Successful Investor Wealth Management Inc., when we look for stocks to buy for our portfolio-management clients, we pay special attention to hidden assets. These are assets that companies own, but that do not carry much weight on company balance sheets. You might think of them as a bonus asset that you get for free.
For instance, when a company buys real estate, the purchase price goes on its balance sheet as the value of the asset. Over a period of years or decades, the market value of that real estate may climb substantially. But the purchase price remains unchanged on the balance sheet.
You have to look closely to spot this hidden value. At times, the hidden value in a company’s real estate can come to exceed the market value of its stock. This hidden value may only become apparent to investors when the company upgrades the use of the real estate. For example, a merchandiser might repurpose a parking lot to build a shopping mall with a residential condo tower on higher floors, and a parking garage down below.
You may recall that Canadian Pacific Railway was something of a dullard in the stock market of the 1980s. But it became a huge winner for us in the 1990s and 2000s, when it put its real estate and other hidden assets to more profitable uses.
Loyal customers can be a hidden asset waiting to be tapped
Companies may have a hidden asset in their relationship with a clientele of loyal customers. After a series of satisfactory dealings, long-time customers develop a level of trust that makes them receptive to related offerings from the company. For example, Apple Inc. was able to move into the digital music player and smartphone businesses as quickly as it did in the past decade because it had an established core of fans for its Mac computers.
It’s doubtful that back then, IBM, say, or Tandem Computer could have duplicated Apple’s phenomenal success with the iPod or the iPhone.
The best time to think about a stock’s hidden assets is when they’re still hidden, long before the company begins taking steps to profit from them. Understanding and seeking out hidden assets can add enormously to your profits in the course of an investing career. But you need patience to profit from them, because they can stay hidden for a long time after you buy.
Hidden assets can also cut your risk. Stocks with hidden assets are likely to hold up better than those whose assets are easier to spot, since they are the last stocks that experienced, successful investors sell. When times are good, on the other hand, stocks with hidden assets tend to do better than average. Good times give them opportunities to put their hidden assets to work.
— Courtesy Fundata Canada Inc.© 2015. Patrick McKeoughis a professional investment analyst and portfolio manager. He is the host of TSINetwork.com, where this article first appeared. Investments mentioned are not guaranteed and carry risk of loss.
