Hidden Value
Hidden values are assets that are undervalued on a company's balance sheet and therefore may not be incorporated into or reflected in the company's share price. A value investor will determine a fair value in any number of ways, depending on the type of company, and then compare this intrinsic value to the value accorded to the security by the market. If the discount is attractive enough for this value investor, they will buy the shares and patiently await the potential convergence of the current market value to the intrinsic value. An asset that is assigned by a company a certain value on the balance sheet to conform to generally accepted accounting principles (GAAP) may be worth more in terms of fair market value. The value investor would separately calculate the current market value of their properties in the determination of whether or how much of a discount to intrinsic value exists.
What Are Hidden Values?
Hidden values are assets that are undervalued on a company's balance sheet and therefore may not be incorporated into or reflected in the company's share price.
So-called value investors seek to uncover hidden values on a company's balance sheet that are often overlooked by the average investor, often through the use of fundamental analysis. An asset that is marked at book value but actually worth more in terms of its fair market price would be considered a hidden value.
Understanding Hidden Value
The essence of value investing is buying undervalued securities_ — _that is, undervalued relative to their intrinsic values. A value investor will determine a fair value in any number of ways, depending on the type of company, and then compare this intrinsic value to the value accorded to the security by the market. If the discount is attractive enough for this value investor, they will buy the shares and patiently await the potential convergence of the current market value to the intrinsic value.
An asset that is assigned by a company a certain value on the balance sheet to conform to generally accepted accounting principles (GAAP) may be worth more in terms of fair market value. Intangible assets such as trademarks and patents could contain hidden values, as could reserves of natural resource companies. In some cases, if an asset has long been held at a cost-basis on the books, it could be worth substantially more than what is reflected on the balance sheet. Likewise, if an asset has been depreciated for accounting purposes, especially when using an accelerated depreciation schedule, it may actually hold more market value than it is attributed to have on the firm's balance sheet.
Example of Hidden Value
A classic example of a hidden value is land. Land must be held at historic cost according to GAAP accounting rules, but there is a high likelihood that this kind of asset has significantly appreciated in value if owned for a long period of time. If the land is isolated from the balance sheet and valued at current market prices, it would probably have a value greater than what is recorded in the financial statements and perhaps comprise a non-insignificant portion of the company's market capitalization.
A retailer such as Tiffany or Macy's, with prime property in Manhattan, for instance, could possess this type of hidden value. The value investor would separately calculate the current market value of their properties in the determination of whether or how much of a discount to intrinsic value exists.
Related terms:
Accelerated Depreciation
Accelerated depreciation is any depreciation method used for accounting or income tax purposes that allow for higher deductions in the earlier years. read more
Balance Sheet : Formula & Examples
A balance sheet is a financial statement that reports a company's assets, liabilities and shareholder equity at a specific point in time. read more
Book Value : Formula & Calculation
An asset's book value is equal to its carrying value on the balance sheet, and companies calculate it by netting the asset against its accumulated depreciation. read more
Capitalization
Capitalization is an accounting method in which a cost is included in the value of an asset and expensed over the useful life of that asset. read more
Depreciation
Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life and is used to account for declines in value over time. read more
Fair Market Value (FMV)
Fair market value is the price of an asset when both buyer and seller have reasonable knowledge of the asset and are willing and not pressured to trade. read more
Full Value
An asset is said to have reached full value when its intrinsic value, perceived worth, is equal to its market price. read more
Fundamental Analysis
Fundamental analysis is a method of measuring a stock's intrinsic value. Analysts who follow this method seek out companies priced below their real worth. read more
Generally Accepted Accounting Principles (GAAP)
GAAP is a common set of generally accepted accounting principles, standards, and procedures that public companies in the U.S. must follow when they compile their financial statements. read more
Historical Cost
A historical cost is a measure of value used in accounting in which an asset on the balance sheet is recorded at its original cost when acquired by the company. read more