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Unearthing Companies With Undervalued Intangibles

Intangibles account for over half the market capitalization of public companies. These intangibles include brand value, a strong organisational process, or an efficient and productive workforce. Despite this, research has shown that investors still often undervalue intangible-heavy companies.

This is not surprising as intangibles, as the name suggests, is very hard to put a value on. There may be times when investors overvalue an intangible asset, like what happened during the dot-com boom. But more often than not, the opposite is true, as intangible-heavy companies usually trade at a discount to their future cash flows and profitability.

Knowing this, investors need to realise the importance of identifying companies that exhibit such characteristics, as it can lead to finding great long-term winners.

Here are two intangibles that investors should look out for.

Stable and reliable management

A stable management is one of the most important intangible assets that an investor should look out for.

One of the best examples of how a stable and strong management team can lead to a long-term winner is Warren Buffett’s company.

Warren Buffett has been one of the greatest money managers of all time and has constantly put shareholder’s interest first. As a CEO, he only takes home $100,000 in remuneration per year, which is one of the lowest among the biggest companies in the world. His main goal is to increase shareholder value. As the largest shareholder in his company, and holding most of his wealth through shares of his own company, his interest is, hence, in line with other shareholders.

Investors should find companies that have a reliable management who puts shareholders interest over their own.

Patented technologies

Do not undervalue the importance of having a patented technology. This is especially so for pharmaceutical and technological companies, who can use these technologies to create a competitive advantage for their business.

Patents are usually difficult to obtain and companies spend a lot of money trying to get their technologies accepted for this recognition.

Despite this, investors may still discount the importance of companies having a patent. This can sometimes be because they do not realise the extent of the technology or how these technologies can benefit in the long-term.

Even though there may be some patents that do not meet expectations in terms of potential benefits it can reap, there are others that are way undervalued.

The Foolish takeaway

Investors too often overlook intangibles. Finding intangibles is great for value investors who are looking to find cheap stocks that have a share price trading at discounts to their true long-term potential. As investors, we should look out for these easy to identify intangibles that can be the difference between a good investment and a great one.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn't own shares in any companies mentioned.