Asset Play

What Is an Asset Play?

An asset play is an incorrectly-valued stock that is attractive because its combined asset value is higher than its market capitalization, the total dollar market value of all the company's outstanding shares, calculated by multiplying a company's shares outstanding by the current market price of one share. The term refers to a stock that is believed by investors to be undervalued because the current price does not reflect the current value of the corporation's assets displayed on its balance sheet.

A stock is called an asset play because the rationale for purchasing the stock is that the company's assets are being offered to the market relatively cheaply, making it an attractive buy or play. Many investors consider asset plays to be sound investments since they are backed by strong assets.

Understanding Asset Plays

The concept of asset plays was first developed by Peter Lynch, among the most well known investors of all time. He categorized stocks into six categories: slow growers, stalwarts, fast growers, cyclicals, asset plays, and turnarounds. According to Lynch, a stock could belong to multiple categories at the same time.

Assets are generally tangible artifacts that can be converted into money-making opportunities. For example, the number of subscribers for a streaming service like Netflix can be considered an asset. Similarly, real estate holdings for a retail company are considered assets.

Often, investors who participate in asset plays purchase these stocks in anticipation of price corrections that will cause the company's market capitalization to increase and, therefore, generate a profit for the investors. Companies that are asset plays may attract attention from firms interested in takeovers because they can be a relatively inexpensive method of acquiring assets.

Asset plays are similar to value investing when investors actively seek stocks they believe the market has undervalued. Investors who use this strategy believe the market overreacts to good and bad news, resulting in stock price movements that do not correspond with a company's long-term fundamentals, giving an opportunity to profit when the price is deflated. Despite the different methodologies used by value investors, the underlying logic is attempting to buy something for less than they think it is currently worth.

Examples of Asset Plays

The world's biggest retailer Walmart can be considered an asset play because it owns valuable real estate, some of them in prime locations, across the country. Also, the Arkansas behemoth has created divisions and separate companies in order to better manage its holdings and cut down on its tax liabilities. For example, Walmart stores pay billions of dollars in rent to a real estate investment trust (REIT) owned by the company itself. The REIT subsequently distributes dividends to investors, enabling Walmart to reduce its taxes.

On a similar note, IBM can be considered an asset play as well because it holds the maximum number of patents among notable tech companies. The patents represent assets which establish a moat around its core services offering and represent a money-making opportunity for the company.