What Are Asset Plays?

An overview of 6 types of asset plays, plus a closer look at 4 opportunities

I had some quiet time last weekend which meant a chance to catch up on a few watchlist stocks and dig around to add to the list (it never empties).

In that digging I came across a few interesting asset plays, a few of which I’ll briefly outline below. An asset play can mean a lot of different things but commonly starts with the balance sheet… These range from low upside / high probability events such as a liquidating business to highly uncertain / big payoff situations such as a deep discount to book value attached to a cash-burning business.

A brief overview of 6 types of asset plays:

1. Deep discount to book value:

   Plain old quantitatively cheap stocks. Fair enough, maybe these don’t qualify as an asset play but if you’re buying something purely based on a discount to book value, then you’re playing it for the asset value on the balance sheet. Occasionally in these situations there’s no operating business or a money losing operating business (if there were a decently profitable business and it happens to be cheap on a P/B basis then it probably fits in the General category as opposed to an asset play). These are the easiest to find using a simple screen but probably have the lowest likelihood of success.

2. Net-nets:

   Good net-nets are harder to find these days… The traditional Ben Graham definition (which heavily discounts many asset accounts) is probably the most widely viewed approach to net-net investing. Sometimes I’ll shortcut this and just look at cash and investments net of all liabilities vs. market cap… Some recent samples in this category that I’ve owned/covered:

   • ALJ Regional Holdings (ALJJ) — Recently taken private by management

   • Taro Pharmaceuticals (TARO) — Announced takeover proposal by controlling shareholder

   • Rubicon Technology (RBCN) — Was and remained a net-net for the entire time I owned it (2017-2022) and then was “acquired” in 2022

3. Hidden assets:

   Maybe there’s an unrecognized or underappreciated piece of real estate on the balance sheet or something that’s fully written off but still has some value left… I owned shares of Lakes Entertainment (LACO) before they merged to become Golden Entertainment (GDEN) and they had a $60m note receivable marked at zero… a year or 2 later they received $24m for that note and distributed it to shareholders. At the time, it was a ~$100m market cap so that was a meaningful chunk of value. Real estate is maybe the most common “hidden asset” but entire business units can be too! Back in 2015, a small BDC named Capital Southwest Corp (CSWC) spun-off some specialty chemical businesses they owned since the 1970’s… that company, CSW Industrials (CSWI), is now a nearly $3bn market cap. You won’t find hidden assets from a basic screen so you’ll need to dig into the filings.

4. Sum-of-the-parts (SOTP):

   I used to dislike pitches on a SOTP-basis… it felt like there was never a catalyst for value realization unless management was actively planning to sell or spin something… Even buying back shares at a “discount to SOTP” or “discount to NAV” may not be enough (thinking of Liberty Global (LBTYA) in that comment). In my view, SOTP means: having a handful of unrelated businesses, or a non-cash generating asset that represents an outsized portion of the market cap, or a minority interest in some other public entity or entities, etc. I remember covering News Corp (NWSA) during the spin-off back in 2013, it was a SOTP story then and remains so today; the stock hasn’t worked 10 years later… IAC Inc (IAC) is an ongoing SOTP story though they regularly shed businesses via spin-off along the way. Same for the Liberty companies. Again, these sorts of opportunities don’t screen well so you’ll need to dig in to uncover them.

5. Liquidations:

   Companies close down operations, liquidate, and distribute the remaining cash to shareholders pretty regularly. Typically these are failed biotechs but other industries can come into play here. Once all employees are terminated, they’ll sell or monetize any remaining assets and then distribute the cash to shareholders less any costs to close up shop. It can take varying amounts of time depending on the assets being sold… anywhere from a few months to several years. There can be potholes in this space as the longer timeframe ones generally have unforeseen liabilities/expenses pop up and eat away your IRR. There are probably a handful of decent ones to invest in annually.

6. Cash shells:

   Consider these as former owners of an operating business that was sold or liquidated but the public company itself decided not to close everything down and give all of the cash back to shareholders. Instead, they want to pursue an acquisition of a new operating business, investment, partnership, etc. in the hopes of creating shareholder value. The driving force behind this scenario typically centers around net operating losses (NOLs) and a desire not to lose those valuable tax shields. This is anecdotal but I feel like the failure rate is more frequent than the success rate with these (but I welcome a correction!). You’re essentially betting on a successful investment made by the board or whatever management might be remaining so upside is highly uncertain. Some notable ones from memory:

   • Horsehead Holdings (ZINC) — blew up

   • Standard Diversified (SDI/SDOI) — became TPB 0.00%↑

   • Pendrell (PCO) — taken private

Let’s move on to the current opportunities…

2 of these are net-nets and 2 are liquidations. This is a surface level overview and with any asset play they usually come with some level of “ick” that will turn off the casual investor in this space…