



Unlike a machine or a part, an intangible asset lacks physical properties and does not impact cash flow. (You can't hold an account receivable either, but when the invoice is paid, cash does flow into the company.)

As a value investor, I pay a lot of attention to the price-to-book ratio. Not only do I want it to be below 3.0, I also want shareholders' equity (aka, "book value") to exceed intangible assets by a wide margin.

The rationale is that a company can inflate its total assets, and thereby its book value, by assigning a higher value to its intangible assets. Many CEOs and CFOs, blinded by their optimism of both their managerial skills and their company's prospects, assign too much value to intangible assets. This is particularly the case for goodwill, the amount paid in excess of identifiable assets for an acquisition.

Since I lack the data to analyze whether a specific company's intangible assets are overvalued or not, I incorporate a margin of safety into my personal screen by penalizing any company with intangible assets that exceed 50% of its book value. It's a subjective percentage, but I feel better having the criteria in place.



Many intangible assets are worth considerable amounts of money. The name "Coca-Cola" and the soda's recipe have helped create a massive amount of profits over the years. The Yahoo domain name remains a prime property on the Web. Microsoft's presence in so many offices and the wide availability of software titles for Windows makes its operating system considerably valuable. But, for every intangible asset that truly does have significant value, there is an unknown number whose values are questionable.


The table below shows the 20 companies in the S&P 500 identified by AAII's Stock Investor Pro with market capitalizations below the recorded value of their intangible assets, as of last Friday's close. This discount suggests that either investors are undervaluing these companies or they think the reported value of the intangible assets is too high. Like the value of intangible assets, whether these companies are actually undervalued is a subjective call.

S&P 500 Stocks Trading at Discounts to Intangible Value

Sealed Air SEE 6,204 2,869 2,716 228.4% 0.94
Alpha Natural Resources ANR 3,150 5,075 1,620 194.5% 0.32
NASDAQ OMX Group NDAQ 6,728 4,961 3,899 172.6% 0.80
Boston Scientific BSX 12,723 7,728 7,861 161.8% 1.02
NYSE Euronext NYX 9,699 6,311 6,128 158.3% 0.99
CME Group CME 27,450 21,620 17,809 154.1% 0.82
Sprint Nextel S 22,417 9,227 14,762 151.9% 1.60
Legg Mason LM 5,112 5,456 3,478 147.0% 0.65
Hewlett-Packard HPQ 54,746 41,288 38,845 140.9% 0.94
L-3 Communications LLL 9,242 6,771 6,796 136.0% 1.01
Xerox XRX 11,752 12,010 9,386 125.2% 0.80
Windstream WIN 6,889 1,337 5,533 124.5% 4.11
WellPoint WLP 22,661 23,644 18,832 120.3% 0.81
Fidelity National Information FIS 10,923 6,662 9,151 119.4% 1.36
Comcast CMCSA 109,280 47,731 92,505 118.1% 1.96
Molson Coors Brewing Company TAP 9,413 7,811 7,998 117.7% 1.02
Time Warner Cable TWC 29,570 7,357 27,398 107.9% 3.78
Republic Services RSG 11,066 7,680 10,535 105.0% 1.38
BlackRock BLK 30,379 25,303 30,179 100.7% 1.22

Source: AAII's Stock Investor Pro and Thomson Reuters. Data as of 8/10/2012.