Often, companies trade at discounts to their net cash and more broadly, the value of their underlying assets, because of the "time to monetisation" factor.
Investors are generally not patient enough to wait for asset value to crystallise.
An example:
Many property companies are currently trading below their book values, not for any of the ominous reasons, but simply because they are land-banking. The land is valuable but it takes many years to be developed and translated into earnings, cash flows and returns to shareholders.
In these cases, opportunity arises when the company unlocks the value of its assets,
- usually coinciding with the emergence of new substantial shareholders or activist investors, or
- when the company undertakes a major strategic change and restructuring or
- the privatisation of a listed entity.
Summary
One of the biggest risks for buying stocks priced far below their net asset values is time to monetisation.
But they could be deep-value stocks, trading at less than net cash in hand and likely to have limited downside risks. Patient investors may well be handsomely rewarded, over time.
