Topic: Daily Advice

Good Assets to Invest in: Stocks With Holding Company Discounts & Hidden Assets

March 7, 2019|by Scott Clayton

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If you are looking for good assets to invest in, keep in mind that stocks with holding company discounts and hidden assets in retail brands or real estate can lead to unlocked value

A holding company discount is a well-known phenomenon in finance. It represents a special kind of hidden asset and source of potential profit for investors in holding companies. Additional types of hidden assets may include real estate or proven retail brands.

Here’s a look at why these are good assets to invest in:

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Good assets to invest include hidden assets

Hidden assets are valuable assets that some investors overlook, discount or disregard altogether. They also have special appeal for companies that are using takeovers of other firms to grow. It may be stating the obvious, but the best time to find hidden assets is when they’re still hidden, long before the company begins taking steps to profit from them.

One of the most important things to look for when evaluating a stock are hidden assets. By definition, a stock’s hidden assets have not had much impact on its price. If you paid little if anything for the assets, you have little to lose.

But the best hidden assets will eventually expand a company’s worth, grab investor attention, and push up its stock price. At the same time, if you buy a stock for its hidden assets, but those assets stay hidden or ignored by investors— or turn out to be less valuable than you thought—it can’t hurt you much.

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 among 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.

Types of hidden assets to look for

Hidden assets in real estate: When a company buys real estate, the purchase price goes on its balance sheet as the historical 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.

Hidden assets in retail: Companies may have a hidden asset in their relationships with loyal clientele. 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 was able to move into the digital music player and smartphone businesses as quickly as it did because it had an established core of fans for its Mac computers.

Good assets to invest in: Understand the holding company discount

A holding company is a firm that owns all or a substantial part of a variety of different businesses. These operations may be private companies, or publicly traded. The one thing most holding companies have in common is that they trade for less than the combined value of their holdings.

A holding company discount becomes most evident when holding companies sell assets or break themselves up into their constituent parts. In other words, holding companies can usually sell their assets for fair market value, rather than at a discount. In addition, fair market value may turn out to be more than analysts figured they were worth. Savvy investors can take advantage of a holding company discount and benefit from the fact that even without a break-up, buying a holding company at a discount to its asset value puts more assets to work for each dollar you invest. Investors should note, though, that this holding company discount strategy can take years if not decades to be realized, so it’s only for long-term investors.

Keep our three-part Successful Investor approach in mind when looking for good overall assets to invest in

 Invest mainly in well-established companies;

• Spread your money out across most if not all of the five main economic sectors (Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities);
• Downplay or avoid stocks in the broker/media limelight.

 What are some of the best investments with hidden assets that you’ve found in your investing career?