Imagine yourself looking frantically for something that’s important to you. Let’s assume,you are searching for keys and time is running fast. As the sands of time start running out, you get nervous & tense as you imagine the angry face of your boss. Then out of the blue; to your relief, you discover, the thing you were looking for was tucked right under your nose! It’s a human tendency to lose sight of things, which lurk right in front of us. When it comes to this flaw, we are in the elite company of giants like Peter Lynch. In this 2nd blog of the series, we explain how!
So, what exactly is an asset play?
An ‘asset play’ is a company, sitting on a huge pile of valuable assets like cash, lands or patents. It is all the more valuable as long as it is little known & the institutions/analysts are still unaware of it. The earlier you know about it the better you can profit from any up-swing in price owing to its discovery.
When Peter got Lynched- The Pebble Beach Story!
Peter always reminds us in his books that in spite of his highly illustrious career as the world’s most successful fund manager; he is as susceptible to miss opportunities as any one of us.
Being an avid golfer, he would spend a lot of time at a little known Golf Course in California called ‘Pebble Beach’. While he was busy perfecting his golfing strokes, it didn’t occur to him that it was a public company. Its stock was selling for $14.5 per share & the entire company was valued at only $25 million. In 1979, within three years, Twentieth Century-Fox bought out Pebble Beach for $72 million i.e. $42.5 per share. Within a day, the acquirers sold Pebble Beach’s gravel pit (very small part of pebble beach) for $30 million. The Gravel pit alone was worth more than what investors, in 1976, had paid for the whole company. This included hotels, two golf courses, 2700 acres of land & 300 year old trees. All this for less than the price of the gravel pit!
Tracking your own Asset Play!
Have you ever been to the High Street Phoenix mall in Mumbai? Do you know, if, rather than shopping, had you invested in a share of Phoenix Mills Private Limited on April 1st, 2009, you would have earned a whopping return of 44.54% (CAGR) in a span of 3 years! The same stock generated 35 times returns on its original investment within a span of 3 years from 2005 to 2008. This used to be one of the biggest cotton mills but faced labour trouble throughout the 1980’s & 1990’s as the cotton industry declined. The promoters of Phoenix Mills realised the commercial importance of their biggest asset: Huge tracts of property in a prime location in Mumbai. By the early 2000’s they converted this entire property into a compound comprising of a bustling mall, hotel, bowling alley and Office area for a bank. Once the Mumbai mall was a success, they replicated the same at Kurla, Pune & other cities. The rest as they say was history.
Learning to Play with Assets!
Not every company that is an asset play, started off as one. It’s a stage in the lifeline of a company, which went about accumulating assets in the course of its business. McDonalds, for instance, was the epitome of a fast grower. But, eventually, as its growth slows down, it can benefit from the extensive real estate assets at prime locations that it owns or repurchases from franchisees.
Some typical assets that one could look at; are:
- Land & Real Estate
- Scrap Metal
- Mines & Oil Wells.
Companies that typically come out of bankruptcy have a very high tax-loss carry-forward. This is definitely an asset as the company wouldn’t have to pay taxes, even when it generates profits till the time this carry-forward is exhausted.
The Final Checklist!
Checks specific to Asset Plays, are:
- What is the type & value of the assets of the company? Are there any off balance sheet or hidden assets?
- What is the debt-load & to what extent it diminishes the value of the assets?
- If a Leveraged Buyout, i.e. a buyout financed by debt, is being carried out, one must look at whether the entire company is going private or only some divisions of it.
- If the former happens to get you a one-time gain; but you get a cut-off from future gains if prices go northwards.
- One must also look at whether the acquirer would generate enough cash flow from the assets to justify the high debt taken up by the company on its books.
- Is it being pursued by any rival or buyout firms/PEs, which can help unlock the value of the assets for the shareholders?
When to yell ‘Sell’!
The possibility of acquisition by a larger company or Investment by PE firms, is a sure shot signal for selling. But it’s important to note that the company should not choke itself with the debt, it takes up to finance the acquisition, as it reduces the value of its asset. Intangibles, in the form of a patent, a drug molecule, goodwill, brand, a pool of talent or even a killer application in the virtual space can be valuable. With a wide array of asset management & PE houses in the play, one can have an idea of when to sell profitably.
If you have seen “Barbarians at the Gate”, you would know that the mad rush to acquire a company often leads to shooting up of prices to astronomical levels, to the benefit of the shareholders. However, one must look at the debt being put to finance the same as lot of acquisitions have been crippled by it.
At the end of the day, asset plays are high gain-low risk assets & bring stability to your portfolio. Finding these hidden assets requires experience and real working knowledge of the company which owns the assets. If you are right on your calculations, you can get good returns. However, if you go wrong, you won’t lose much. Hence, if you have the patience & are looking for a less risky investment avenue, we wish you Happy Playing!