Balance Sheets: The Good, the Bad and the In-Between

Undervalued assets: This metric of strength is a little more difficult to spot. In fact, undervalued assets might not be recognized at all unless you do some research into the company itself.

According to accounting rules, assets are held at cost less accumulated depreciation . Thus, there may be some value over and above the "book value" of certain assets. Here is a look at the sources of two typically undervalued assets:

• Real estate: What happens if a company has a piece of prime property, such as Macy's (M Quote) block-long Herald Square store in midtown Manhattan? The balance sheet does not reflect the current value of such an asset (see fair market value ). If you dig a little deeper into what a company owns, sometimes you can find a real diamond in the rough. For example, real estate was one of the motivating forces behind Eddie Lampert's acquisition of Kmart debt in bankruptcy and subsequent acquisition of Sears (SHLD Quote).
• Intangible assets: "Intangibles" represent certain nonphysical intellectual property and rights that a company might own. These assets usually have no recurring cost other than the initial development and legal fees incurred to create the items. However, the potential for monetizing those intangible assets is enormous.

  Examples of intangible assets would be a brand name such as Coke (KO Quote) or a logo such as the Ralph Lauren (RL Quote) polo horse. Again, Sears offers some intriguing hidden value with brand names such as Craftsman (tools), Kenmore (appliances) and DieHard (auto batteries). As a result, Sears' balance sheet is another one of my favorites.