The many models of investing: Asset plays

So far I’ve covered two models of investing – predictable value investing and special situations. This time I’ll cover one more model of investing that I like to look at – asset plays.

An asset play is investing in a stock that is undervalued compared to the total current value of the company’s assets. To give you a simple analogy, it’s like a buying a wallet and all its contents for ten bucks when you know it already contains twenty dollars cash inside.

When you look at an asset play, you need to focus on the management, financials and valuation quadrants. The business model of the company is not much of your concern because you’re interested in the company’s assets and less so its day-to-day business operations.

  • Financials. Under the company’s financials, take a look at the assets in question and determine what they are. In my book, there are three forms of assets that have a true, tangible value to them: 1) marketable securities2) real estate and 3) cash. Any other forms of assets are hard to truly quantify and value. For example, plant & machinery may be worth a million dollars on the books. But when it comes to selling them, you’d be hard-pressed to dispose of them at that value. The pool of available buyers who can buy such specialised equipment is extremely limited and you can’t simply pick up the entire plant and ship it off somewhere else. Because of that, you can’t include them in your valuation of assets; their book value almost always isn’t the same if it were to be liquidated.
  • Valuation. Once you’ve properly determined the assets and the true net asset value (NAV) of the company, take a look at the company’s market capitalisation. If the stock is trading at $50 while the NAV of the company is $100, you’ve got yourself an asset play!
  • Management. While it’s one thing to invest in an undervalued company as an asset play, it’s another thing to actually unlock that asset value and realise its profit. That’s where management comes into play. You want a management team that is aligned with shareholders’ interests and thinking of ways to unlock the company’s asset value while distributing it back to shareholders in the form of dividends. If the management isn’t interested in this, it might take a long time for you to see your returns coming. Of course, another way you could profit is the market finally recognises the value of your asset play and prices the stock upwards.

To conclude…

Asset plays are a simpler and more straightforward way to invest compared to the other models simply because there are less moving parts to analyse; you’re just buying up whole assets at a discounted price. They don’t always come by but if you spot a good one after doing your due diligence, don’t waste time snapping it up!

[Step-by-Step Case Study: How I Used the Asset Play Strategy to Make 106.11% in Less Than 2 Years]

Photo: http://www.flickr.com/photos/fergusonphotography/3056953388/

Vicor Chng is an equity investor and co-founder of The Fifth Person. Victor has also appeared on national radio on Money FM 89.3 for his views and opinions on how to invest successfully in the stock market, and his investment articles have been published on The Business Times and Business Insider. Victor represented Singapore in the 2008 TAFISA World Games in Busan, South Korea and was the 2008 IFMA World Muay Thai Championships bronze medalist, kicking some serious ass along the way.

2 Comments

  1. Azrael

    September 8, 2016 at 5:06 pm

    Hi Victor,

    What are marketable securities on the balance sheet?

    I don’t really see them at all (I read that supposedly they are under “Current Assets”).

    Regards
    Azrael

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