Buying stocks trading for less than their net tangible asset (NTA) backing has proven effective for many investors over the years. While it is often quite straightforward to calculate the stated discount, the devil is (again!) in the detail. There are at least two problems that can arise with buying stocks meeting this criterion.
First, the investor needs to determine if the stated NTA is a realistic assessment of value. Often the actual market price a company could get in a liquidation of its assets is lower than the stated book value. Hence there is a need for a margin of safety to be applied and a conservative assessment of realisable asset value to be determined by the investor.
Second, if a business is struggling or declining, the NTA value may continue to fall. This scenario (which can be described as a value trap) makes it very hard for a share price to rise towards a conservative assessment of NTA when the overall business and its balance sheet are experiencing downwards pressure.
Property is an appealing asset given its secure, tangible, long-life qualities and its ready comparison with other similar property assets. This often makes companies with property assets good candidates to consider for investing in when they trade substantially below stated NTA.
With the previous warnings in mind, here are four property companies that are all trading between 40% and 80% below their stated NTA backing.
- Devine (ASX: DVN) is a housing and property development company that offers investors exposure to the property markets of Victoria, Queensland and South Australia.
- FKP Property Group (ASX: FKP) is a property and investment company that has operations in the residential, commercial, industrial and retirement sectors.
- Galileo Property Trust (ASX: GJT) owns a range of Japanese real estate assets. The company may be out of many investors' comfort zones given its high debt levels, though Galileo is currently addressing the debt issue through a recapitalisation program.
- RNY Property Trust (ASX: RNY) offers shareholders exposure to the New York property market through the ownership of 25 office properties.
Foolish takeaway
Investing in knocked down companies generally comes with a higher set of risks than many investors are comfortable with. They often also involve companies with high levels of debt which adds to the risk level. However incorporating a large margin of safety and taking a portfolio approach to these types of stocks can produce pleasing returns.
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Motley Fool contributor Tim McArthur owns shares in Galileo Japan Trust.
