Asset plays: Concept, examples, advantages and disadvantages

Asset plays: Concept, examples, advantages and disadvantagesAny investor who follows the postulates of value investing tries to pay for shares a price lower than their intrinsic valuecounting on a safety margin enough. In some companies, the intrinsic value calculation may be based primarily on the value of their assets. If the investment is interesting, we could be facing one of the so-called asset plays. In this article we will see what asset plays are, an example and the advantages and disadvantages of investing in this type of business.

¿Qué son los asset plays?

Asset plays are one of the categories that are part of the classification of shares of Recommended books to learn to invest in the stock marketand it is one of my favorite investment books. We can define asset plays as companies with a net intrinsic value of their assets (real value of their assets minus real value of their debts) greater than their capitalization bursátil current. These assets can be financial assets (such as cash or shares of other companies), real estate assets, patents, contracts, etc. They can also be accounted for at their real value (eg Money in the bank) or be accounted for at a lower price than the real one (eg a building that has increased in value over time).

In the (rather rare) case where the book value of your assets and liabilities equals their actual value, the asset plays will be companies whose ratio bursátil P / BV (price / book value) is less than 1.

The investor, to make his investment profitable, will only have to wait for the market to end up reflecting the real value of the company's assets in its stock price.

Investment example in asset plays

Suppose a company is listed with a market capitalization of € 10 million and has the following assets and liabilities accounted for:

  • A building accounted for 5 million euros. Its real value is 15 million euros.
  • Cash in cash worth 10 million euros.
  • The company also has debts worth 5 million.

The company is not operational, so it will not have expenses, profits or losses in the future.

First of all, we can see that its book value is not equal to its actual value. This is because the real value of the real estate assets (the building) is much higher than the value reflected in the accounting.

  • Book value: 5 + 10-5 = 10 million euros
  • Intrinsic value: 15 + 10-5 = 20 million euros

When it comes to analyzing companies, we are interested in analyzing their real intrinsic value, not their book value. Therefore, what we must compare is its intrinsic value with its market capitalization, ignoring its book value.

In this case, we are facing asset play, since its intrinsic value (20 million euros) is higher than its market capitalization (10 million euros). This would give us a safety margin 50% on this investment.

It is true that this example is quite simple, but I hope it helps you to get an idea about how the analysis works to determine if we are facing asset plays.

Advantages of investing in asset plays

The main advantage of investing in asset plays is that the companies in which you invest have a safety cushion, which is the value of their assets, which makes it difficult (although not impossible) for their value to deteriorate.

Another advantage of investing in this type of company is that in some cases the calculation of its intrinsic value is usually quite simple, in the case that the accounting reflects well the value of its assets.

Disadvantages of investing in asset plays

The biggest drawback of focusing on investing in these types of companies is that they are very difficult to find. Maybe at the time of Benjamin Graham It was simpler, but the market has become a lot more efficient when it comes to this. However, I don't mean to say that finding asset plays is impossible, just that it's not as easy as before.

Another drawback of asset plays is that the value of assets can end up deteriorating over time, causing their value to decrease. For example, a company may have a number of patents expiring, or the company spends its cash on ruinous investments.

Finally, even if we find a company that meets all the requirements, and that its assets do not lose value, it may take time for the market to reflect the real value of the company, causing us to be invested in a company that does not creates value.