Investing should be simple, but not too simple. Theoretically, we could buy an undervalued business and wait for the market to recognize its true value. However, the waiting time should be taken into consideration. If you could buy a business, which is worth $12, for $10 on the stock market, and that business could reach its fair value in one year, your annualized return will be 20%. If it takes five years for that business to reach its fair value, your annualized return will be far lower, at only 3.7%.
On the market, many investors can easily point out several businesses, which are trading for much less than their assets on their balance sheet. However, those businesses have two common characteristics. First, their businesses are struggling. Second, their undervalued assets are mainly real estate. Real estate assets are often illiquid, and it normally takes quite a lot of time for the market to recognize its full value.
Sears Holdings Corporation (NASDAQ:SHLD) is a typical example. Its business has been struggling for several years. In 2012, it generated $39.8 billion in total revenue but produced a loss of $930 million, or $8.78 loss per share. Sears seems to be a bit overleveraged. As of Jan 2013, it had $2.75 billion in total stockholders’ equity, $609 million in cash and $3.1 billion in both short-term and long-term debt. In addition, it recorded $2.73 billion in pensions and other benefits. The second biggest item on its asset, after PPE, was inventory, at nearly $7.6 billion.
Sears had huge real estate assets. Bruce Berkowitz, one of the most successful value investors, has bought around 17 million shares, or 13.4% stake in the company. He stated that Sears Holdings Corporation (NASDAQ:SHLD) has more real estate than Simon Property Group, Inc (NYSE:SPG), the largest real estate company in the world. However, Simon Property operates as a REIT, owning or having interest in 325 retail real estate properties with 242 million square feet and a 29% interest in 260 shopping centers in 13 countries in Europe via Klépierre, a publicly traded REIT.
At the current trading price of nearly $159 per share, Simon Property has a total market cap of $49.8 billion, while Sears is worth only $5.3 billion on the market. Berkowitz thought that if all of Sears’ real estate was fully valued on its balance sheet, Sears would reach more than $160 per share. While Sears Holdings Corporation (NASDAQ:SHLD) is trading at 1.92 times book value, Simon Property Group, Inc (NYSE:SPG) is valued at as high as 8.3 times its book value.