Hidden value is one of the key factors we look for when we’re looking for winning stock picks to recommend in our investment advisories, including Wall Street Stock Forecaster, our newsletter for investing in the U.S. markets.
By hidden value, we mean valuable assets that are not getting the attention they deserve from investors.
Here’s how that can translate into making winning stock picks: When a company’s assets are wholly or partially hidden, the stock trades for less than it’s really worth, so you get to buy at a bargain price.
Hidden assets come in many forms. For example, companies often carry their real-estate assets on the corporate books at its purchase price, even though its value has multiplied many times over the years.
A company’s brand name is another good example of a hidden asset. Balance sheets often fail to assign any value to brands, even those household names that have built up multitudes of loyal customers over the years.
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Winning stock picks: Here’s a diversified manufacturer with a collection of strong brands
United Technologies (symbol UTX on New York), one of the stocks we cover in our Wall Street Stock Forecaster newsletter, provides an excellent example.
(We’ve updated our buy/sell/hold advice on United Technologies in the latest issue of Wall Street Stock Forecaster. See below to learn how you can get this issue absolutely FREE when you take a 1-month trial subscription today.)
United Technologies has six main businesses: Pratt & Whitney makes aircraft engines; Otis makes and services elevators; Carrier makes heating and air-conditioning equipment; UTC Fire & Security sells burglar alarms and fire-protection services; Sikorsky makes helicopters; and Hamilton Sundstrand makes aircraft controls.
These are powerful brands that are widely recognized around the world.
The company operates in cyclical industries. That adds to its risk. Still, its leading brands help it attract and retain customers. Moreover, many of its products, such as jet engines and elevators, need constant maintenance.
High research and development spending another key hidden asset
United Technologies continues to spend heavily on new products. The company spent $1.7 billion on research in 2010, up 12.1% from $1.6 billion in 2009. The jet engine and aerospace businesses accounted for the bulk of this spending.
Companies have to treat their research spending as a day-to-day expense, much like salaries or taxes. So research spending comes out of the current year’s sales, and lowers the current year’s earnings. But the resulting new products could fuel a company’s growth for years to come.
The company has set aside $1.5 billion for acquisitions this year. It’s particularly interested in companies in fast-growing overseas markets, like Asia and Latin America, where new construction is spurring demand for elevators, heating and air conditioning.
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Growing by acquisition adds risk, particularly in unfamiliar markets. In the latest Wall Street Stock Forecaster, we take a fresh look at United Technologies to see if its strong brands will help it keep increasing its share price and gaining market share.
Our analysis is based on all the company’s fundamentals, including its latest earnings, its current market position, and its price-to-earnings (p/e) ratio (the ratio of a stock’s market price to its per-share earnings). We conclude our analysis with our clear stock advice on whether you should buy, hold or sell this intriguing U.S. stock.
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