Should you consider an Asset play for your portfolio?

Peter Lynch came up with six major stock categories during his investing days.

These categories helped Lynch balance his portfolio. Putting companies in categories also helped Lynch set realistic expectations for their performance.

So far, we’ve looked at five key categories of companies: Fast growers, slow growers, turnarounds, stalwarts and cyclicals.

Today we’re going look at the final category, asset plays.

What qualifies as an asset play?

Asset plays are companies that are trading below their net asset value (NAV). This means investors are buying assets held by the company at a discount to what such assets are worth.

For example, if a company has a NAV of $1 and a share price of $0.5, it means that investors are buying shares of the company at a 50% discount.

This asset can be real estate, excessive cash, or any other assets that the company has on its balance sheet.

One such company listed on the Hong Kong market is Link REIT (SEHK: 823).

Link REIT is the largest real estate investment fund listed in Hong Kong-based on its market capitalization, which stands at approximately HK$139 billion.

The real estate owner reported a NAV of HKD$89.47 for FY2019, while its share currently trades for HKD$67.50. This means that Link REIT is trading at a significant discount to its NAV.

When should investors expect from an asset play?

For asset pays, investors need to keep expectations moderate and remain patient.

Patience is the most important aspect of investing in these companies because no one can predict how long it will take for the shares to revert to its NAV.

This could be in a couple of months, years, or never.

When should investors sell an asset play?

An investor should typically sell an asset play when it’s trading for its NAV or at a slight premium.

It’s also important for investors to sell asset plays if these stocks are becoming value traps. A value trap is when a stock is priced cheaply based on valuation metrics but never returns to its mean valuation.

In the case of asset plays, an asset play trading below its NAV but unlikely to revert to that price, would indicate a value trap.

Who should buy asset plays?

Asset plays are good for investors who have the patience the wait for a long time before the market appreciates the value of a company’s asset.

Of course, if the company pays a dividend, one can look at it as an income-generating stock while waiting for capital appreciation.

Foolish conclusion

In conclusion, asset plays are good companies for investors with patience. Investors should also keep an eye on such companies to make sure that they don’t become value traps.

We have now completed our six-part series examining Peter Lynch’s famous company categories.

Understanding what category a company belongs in can help investors set realistic expectations for company performance. It can also help investors diversify their portfolio, ensuring that they don’t have too much of a single kind of company.

This could come on top of other diversification methods, such as across different industries and different geographies.