DEFINITION of 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 are keen to uncover hidden values on a company's balance sheet that are often overlooked by the average investor. An asset that is marked at book value but actually worth more in terms of fair market price would be considered a 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, he or she 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. A classic example is land. Land must be held at historic cost according to accounting rules, but there is high likelihood that this asset has significantly appreciated in value if owned for a long 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 like Tiffany or Macy's, with prime property in Manhattan, for instance, possesses this type of hidden value. The value investor would separately calculate the current market value of their properties in determination of whether or how much of a discount to intrinsic value exists.