There will always be stocks you’ll wish you bought, especially after you see their growth. Here’s what to look for so you won’t miss out.
Stocks you’ll wish you bought often include hidden assets, or other favourable features. Hidden assets are one of the factors we use to single out stocks that we recommend in our publications and put in our clients’ portfolios.
The concept of hidden assets is technical, complicated and profitable. If you want to learn more, I’d suggest you read Where the Money Is: Value investing in the Digital Age, by Adam Seessel. The book is highly informative, and an easy and enjoyable read. Highly recommended!
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Stocks you’ll wish you bought: Ones with hidden assets
In the early years of my investment career, I fell in love with the concept of “hidden assets.” My view is that hidden assets can help you expand profits while limiting losses. It’s a broad concept, but easy to visualize if you think of it in basic terms.
For instance, when a company buys a $1 million piece of real estate, the purchase can appear on its balance sheet in various ways. Let’s stick with the simplest: it borrows the money to pay for the purchase, and that $1 million item appears on the balance sheet as a $1 million debt or liability. The $1 million piece of real estate appears on its balance sheet as an asset. These two $1 million entries offset or balance each other (that’s why we call it a “balance sheet”).
Let’s say that over the next year, the value of the property rises by 5%. The $1 million asset is now worth $1,050,000, which is $50,000 more than the cost of the property. However, the $50,000 gain is only hypothetical. (The property’s value could drop by $50,000.) So, the $50,000 becomes a “hidden asset” (a Successful Investor term for an asset that doesn’t generally appear on the balance sheet).
Successful investors try to keep an eye out for hidden assets like this. If the property’s value goes up by an average of $50,000 a year for 20 years, then the value of the company’s investment has doubled to $2 million. That’s a significant rise, but it still only qualifies as a hidden asset. That’s because balance sheets show the company’s investments at cost, not at their latest appraisal value.
That’s the basic idea behind hidden assets: These are assets that accumulate in a company’s holdings over a period of time, but don’t necessarily appear on its balance sheet. Real estate that gains in value over a long period is a common source of hidden value.
Stocks you’ll wish you bought: Spinoffs
A spinoff takes place when a company decides to get rid of a portion of its asset base, possibly because it wants to focus its activities elsewhere, but is unable to sell the assets for a price that it feels reflects their value. Instead, the parent company sets the assets up as a separate company, then hands out shares in that publicly listed firm to its current investors.
Spinoffs generally work out well over a period of several years for both the spun-off stock and its parent. The management of a parent company will only hand out shares in a subsidiary to its own investors if it’s fairly confident that the subsidiary, and the parent, will be better off after the spinoff than before.
Parent companies may devote great effort to ensuring that the spinoff has adequate finances and strong management. They want the spinoff to succeed, for their own prestige, and because they want the spun-off stock to benefit its shareholders.
Furthermore, spinoffs involve a lot of work and legal fees. That’s why companies only have an incentive to implement spinoffs under favourable conditions. All in all, it pays to follow spinoff opportunities wherever you find them.
Stocks you’ll wish you bought: Value stocks
One of the key principles of our Successful Investor philosophy is to buy high-quality “value stocks:” They’re stock picks that are reasonably priced, if not cheap, in relation to their sales, earnings and assets. Typically, value stocks trade at prices lower than their financial fundamentals would suggest.
As more investors come to recognize the value of these stocks, they often begin to rise. Well-informed investors who recognized the value when the stock price was lower then benefit from the rise.
If you stick to high-quality value stock picks, like those we recommend with our Successful Investor approach, your short-term gains and losses can average out but you’ll still show above-average profits in the long run. Here are some key factors to look for when judging an undervalued stock’s investment quality:
Freedom to serve (all) shareholders.
Freedom from business cycles.
Ability to profit from secular trends.
Industry prominence if not dominance.
Ownership of strong brand names and an impeccable reputation.
Use our three-part Successful Investor approach for all of your investments, including stocks you’ll wish you bought before it’s too late
Hold mostly high-quality, dividend-paying stocks.
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 stay out of stocks in the broker/media limelight.
What is an example of a stock you wish you bought when it was starting out?
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