The best companies to buy stock in will likely have hidden assets in one or more of the following areas: real estate, research and development, or brand loyalty

When we look for stocks to buy, we pay special attention to hidden value. If you’re a long-time reader, you know we’ve talked about hidden value many times over the years.

The best companies for Successful Investors to buy stock in are profitable, well-managed companies that have been in business for a few decades or more. At the same time, they tend to pile up a variety of assets. Some of these assets are obvious to investors, because they generate regular profits. But some corporate assets represent hidden value that is widely overlooked by those same investors.

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The best companies to buy stock in often hold real estate as a hidden asset

The classic hidden asset is real estate that has gained value after the company bought it, but still appears on the company’s financial statements at the purchase price.

The value may have gone up because of a general rise in real estate prices. However, value may have also gone up because of favourable changes in the neighborhood such as a rise in average incomes. This can have a double benefit. In the case of a retailer, for instance, the rise in the value of stores it owns may reflect neighbourhood improvements that enhance the long-term potential for sales growth at its stores.

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 have to look closely to spot this hidden value. But at times the hidden value in a company’s real estate can come to be equal to a large part of the market value of its stock.

Among the best companies to buy stock in, brand loyalty can be one of the most overlooked hidden assets

Similarly, companies build hidden value when they acquire a clientele of loyal customers. Having had a series of satisfactory dealings with the company, these customers may feel a level of trust that makes them receptive to doing other kinds of business. This hidden value only becomes apparent when the company tries to do a wider range of business with the customer.

For example, Apple Computer 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.

Research and development is another hidden assets among the best companies to buy stock in

Another example of hidden assets is research and development spending. Technology companies spend large sums of money developing new practices and technologies that can change the world. This research may not pay off for decades, but if you’re a keen investor, you can see what companies spend on research and development via their income statements.

For example, technology stocks invest in research and development more than other types of stocks. The technology stocks with the greatest long-term potential are those that continue to make significant investments in research and development.

Technology stocks have always been a more speculative segment of the stock market—and tech stocks are often overpriced. This is because many investors have inflated ideas of their value.

However, Successful Investors can turn the odds in their favour by investing in tech stocks that have hidden assets, or assets that other investors overlook. Those hidden assets can offer dramatic rewards for investors.

Among technology stocks, research-and-development spending is today’s best-hidden asset. High research-and-development budgets let tech stocks keep adding profitable new products and improving existing ones.

Technology stocks have to treat this spending as a day-to-day expense, much like maintenance or taxes. So research spending comes out of the current year’s sales, and it lowers the current year’s earnings. As a result, earnings per share for tech stocks may appear lower than for stocks in other industries. But, when done right, research and development spending pays off in dramatic long-term returns, both for high-tech companies and for those who invest in technology stocks.

To sum up: the best companies to buy stock in often have hidden assets

Understanding hidden assets can add to your profits in the long term. Stocks with hidden assets are likely to hold up better than those whose assets are easy to spot, since they are the last stocks that experienced Successful Investors sell. When times are good, stocks with hidden assets tend to do better than average, since good times give them opportunities to put their hidden assets to work.

The best time to find 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 while you’re evaluating a stock can add enormously to your profits in the course of an investing career. But you need the patience to profit from them because they can stay hidden for a long time after you buy.

To what extent do you factor hidden assets into your investment decisions?

What’s an example of a stock you bought based in part on the company’s hidden assets?