SINGAPORE (Oct 15): When I started investing in the 1990s, I quickly became intrigued by companies with assets that were overlooked by the market. In some cases, the asset in question was simply a pile of cash or liquid securities. Other times, it was a strategically located parcel of land that could be sold or developed. The one thing all these assets had in common was that they were not generating significant earnings, which is why the market capitalisation of the companies that owned them did not fully reflect their value. The way I saw it, buying shares in such companies was akin to buying their underlying assets at a bargain price.
Over the years, however, I discovered these sorts of stocks were not always good long-term investments. A balance sheet loaded with assets earning little or no return can be a symptom of a pernicious disregard for shareholders. Such companies might be in no hurry to tighten up their overly liquid balance sheets or realise the value of their underutilised assets. With little need to raise cash to grow their businesses, they have little reason to worry about the market value of their stock or pay attention to what small-time investors like me might want. In short, these stocks are often “value traps”.
These are unusual times, though. The long period of low inflation and loose monetary policy seems to be coming to an end. So is the abiding faith in marketoriented economic policies and international trade. Meanwhile, technology is disrupting everything. Yet, at the same time, the US subprime crisis is becoming an increasingly distant memory, and corporates are once more making big moves to position themselves for long-term growth. And, even as Asian markets are wilting in the face of tightening global liquidity, corporate insiders have apparently not lost their confidence in the future.