Asset Play 

Asset play is a strategic approach in the stock market where investors seek opportunities in companies whose real value, based on their underlying assets, is not fully reflected in their share prices. While it might sound complex at first, asset play is relatively straightforward when broken down, making it a helpful starting point for beginners exploring value investing. 

This guide covers all the essential aspects of asset play investing: what it is, how it works, its role in value investing, associated risks, and real-world examples. 

What is Asset Play? 

An asset play refers to investing in a company whose market capitalisation is lower than the value of its underlying assets. In simpler terms, the company’s shares are trading for less than the value of what it owns, such as real estate, patents, cash reserves, or stakes in other businesses. 

For instance, if a company has total assets worth US$ 500 million but a market capitalisation of only US$ 300 million, investors may see this as an opportunity. They hope the market will eventually realise the company’s actual worth, leading to a share price increase and resulting profit. 

Asset plays offer a way to potentially earn returns from price corrections, acquisitions, or corporate actions that reveal hidden value. 

Understanding Asset Play 

To grasp asset play, it’s essential to understand how the market sometimes misprices companies. This mispricing often happens due to poor earnings, lack of investor interest, or hidden value that is not immediately obvious. 

Key Features of Asset Plays 

• Undervalued assets: The company holds assets that are worth more than the market believes. 

• Market mispricing: The share price doesn’t fully reflect asset value. 

• Potential catalysts: Corporate restructuring, asset sales, or takeover attempts could trigger a price correction.
   

Types of Assets Typically Considered 

• Tangible assets like land, buildings, cash, and marketable securities. 

• Intangible assets such as patents, licences, trademarks, or proprietary technology. 

• Strategic holdings in subsidiaries or joint ventures. 

These assets may not directly contribute to the firm’s revenue, but can significantly impact its valuation if properly accounted for. 

Concept of Asset Play in Value Investing 

Value investing involves purchasing stocks that are undervalued relative to their intrinsic worth. Asset play is a branch of value investing where the investor focuses on asset value rather than company earnings or growth forecasts. 

How Does Asset Play Align with Value Investing? 

• Focus on net asset value (NAV): Investors look at the value of assets minus liabilities. 

• Margin of safety: Asset-heavy companies provide a cushion, reducing risk. 

• Catalyst-based: Investors seek triggers that could unlock hidden value. 

• Patience is essential: The market may take time to recognise the actual value.
   

Peter Lynch’s View 

Renowned investor Peter Lynch classified asset plays as a distinct group in his investment strategies, describing them as stocks where the asset value is likely to be realised in the future, offering considerable upside with limited downside risk. 

Risks and Challenges of Asset Play Strategies 

Despite its appeal, asset play investing is not without challenges. Understanding these risks is crucial before diving into this strategy. 

Key Risks Include: 

• Illiquid assets: Some assets, such as specialised machinery or non-core land, may not be easily sold. 

• Hidden liabilities: The company may carry debts or contingent obligations that reduce asset value. 

• Management resistance: Company leadership may be reluctant to unlock asset value or may utilize resources inefficiently. 

• Unrealised potential: Assets may not appreciate as expected or may be overstated on financial statements. 

• Slow market response: It may take a considerable amount of time for the market to correct mispricing. 

Thus, careful research and analysis are necessary to ensure that the assets are truly undervalued and that there’s a realistic path to unlocking that value. 

Examples of Asset Play 

Here are current examples from the US and Singapore markets to help illustrate how asset plays work in practice: 

1. IBM (United States)

IBM, a global technology company, holds a vast portfolio of patents and intellectual property. Although its business segments have faced stagnation, its patent assets continue to be a source of value. These intangible assets generate revenue through licensing and also provide a competitive advantage. During periods of low market confidence, IBM shares have been considered undervalued compared to the estimated value of its patents and R&D infrastructure. 

2. CapitaLand Investment (Singapore)

CapitaLand Investment Limited is known for managing a diversified real estate portfolio, including commercial and residential assets across Asia. Investors have often identified it as an asset play due to the sheer volume of properties it owns. At times, its market capitalization has trailed the estimated book value of its property holdings, presenting an opportunity for investors to buy in at a discount to net asset value. 

These examples demonstrate that the strategy applies both to traditional asset-heavy companies and those with valuable intangibles or real estate holdings. 

Frequently Asked Questions