An asset play is a company which is worth more dead than alive.
Asset play… in other words the company’s market capitalisation (the number of issued shares multiplied by the market price of the shares) is significantly lower than the sum of all the company’s assets. This means that the company is trading at a discount to net asset value and its assets are offered to the market at a bargain price, making for an attractive investment proposition. These shares attract investors as the investment is backed by valuable assets.
The company owns something very valuable which is currently being ignored. There are many assets that might be disregarded by the market – cash, real estate, a separate division, a patent, a new business that is being spun off, a new resource discovery, metals, oil, newspapers, T.V. stations, and patented drugs. Asset plays can be found anywhere.
Asset plays will be bought and sold at a discount to net asset value because they are typically no growth companies whose profits are static or falling, which do not pay dividends and where minority shareholders cannot break the company up and pay out the proceeds to themselves.
The point is that sooner or later this value will be discovered. This can happen through a hostile takeover bid, or new management, or a return to profitability.
Assume you discover a property company with a net asset value of R3.00 and market value or trading value of R1.00 a share and assume property price inflation is 10%. For every R1.00 you invest, you are getting underlying property worth R3.00. After the first year, the property is worth R3.30. You now have a 30% growth in the value of your underlying investment. If at the same time a new board of directors is appointed, profitability improves, dividends are paid, some properties are sold and capital is returned to the shareholders, you, the investor, will have bought a share which are going to increase in value several times.
But watch out! Perpetual and continuing losses can erode the company’s assets to such an extent that it can’t be saved.