What are hidden values?
A company’s balance sheet may undervalue hidden values, which may not affect its share price. Value investors utilize basic research to find hidden values on a company’s balance sheet that a regular investor may ignore. Hidden values refer to assets recorded at book value but worth more at fair market value.
Knowing Hidden Value
Investing in undervalued securities involves buying them below their actual worth. Value investors calculate a fair value using various methods, depending on the firm, and then compare it to the market value. If the discount is appealing, this value investor will acquire the shares and wait for the market value to reach the intrinsic value.
Assets allocated a value on the balance sheet to comply with GAAP may have a higher fair market value. Intellectual property like trademarks, patents, and natural resource deposits may have hidden worth. A long-held asset on a cost basis on the books may be worth far more than what is on the balance sheet. Similarly, assets depreciated for accounting reasons, particularly with an accelerated timetable, may have a higher market value than reported on the balance sheet.
Example of Hidden Value
Land is a classic hidden value. GAAP accounting requirements require holding land at its historical cost, although long-term ownership can lead to considerable value appreciation. Valuing the land at current market pricing may reveal a higher value than represented in the financial statements and contribute to the company’s market capitalization.
A business like Tiffany’s or Macy’s with an outstanding Manhattan location may have hidden worth. Worth: investors evaluate the current market worth of their assets to see if there is a discount to their intrinsic value.
Conclusion
- A company’s share price may not represent hidden values, which are balance sheet elements.
- Land and equipment depreciated to book value may have hidden worth.
- Value investors seek firms with hidden values, hoping their stock price will represent their actual value.
