Also known as hidden reserves, hidden values are assets that are included on the balance sheet of a company, but are reported as a less than their true value. Carrying the reserves at an undervalued rate allows the assets to be excluded from consideration when it comes to setting the price of stock shares issued by the business. Many investors make it a point to identify these undervalued reserves when evaluating stock options for purchase and inclusion in an investment portfolio.
Hidden values can include just about any type of asset. Real estate that is undervalued is one prime example. It is not unusual for businesses to also hold patents that at least for a time are valued at a lower rate. The same general approach can be used with trademarks that are created and held in abeyance, sometimes for use in a later project or expansion effort.
One of the purposes of hidden values is to create a situation where the net worth of the business is at less than market value, thus creating a situation where the stock price is slightly lower than it would be otherwise. This actually allows a company to engage in what is sometimes called cookie jar economics. With this approach, certain assets are carried at below market value until circumstances make it in the company’s best interest to reclassify the worth of one or more hidden values in order to adjust quarterly, semiannual, or annual earnings reports. By making use of this cookie jar reserve, the company can minimize the impact of a temporary drop in sales on the overall financial well being of the firm, and allow the price of outstanding stock shares to remain more or less constant.
Investors who utilize a value investing approach will actively look for hidden values held by a given company. Doing so provides a more accurate picture of what type of assets the company can bring to bear in the event that some factor threatens to negatively impact the price of the stock. Investors often like to know that a company has a certain amount of hidden values on hand, as it indicates shrewd financial management on the part of the owners and directors of the business. At the same time, an inordinate amount of hidden values may indicate something other than simply creating a financial cushion for the business, causing the investor to investigate further into the general operations of the company.
