I love to read stories about the rise and fall of business ventures. Not only are they entertaining, but these case studies can also reveal some important investing insights. 

One in particular that has stuck with me over the years is the tale of Greyhound Bus Lines. Back in 1994, the transportation company was running on fumes. It had recently made the difficult decision to raise fares, which didn’t sit well with customers. Passenger volume was declining sharply, taking a heavy toll on revenues and earnings. 

#-ad_banner-#Even more troubling, there was an ongoing feud between management and labor. Bus drivers had already walked off the job a few years earlier in a lengthy strike. The two sides eventually reached a delicate agreement, but tensions were starting to flare again. 

These issues created quite a bit of anxiety for investors. But the market really panicked when credit rating agency Standard & Poor’s downgraded the firm’s debt to “CCC,” a level indicating high risk of default and bankruptcy. Greyhound shares plummeted as low as $1.50, and the outlook was grim.

About that same time, a small group of investors dug into the financial statements and saw something that the crowd had missed entirely. It had nothing to do with operating margins or net profits or other such metrics. Buried deep in the balance sheet, they found that Greyhound owned a substantial amount of prime real estate.

For decades, Greyhound had been acquiring land (often in the heart of the city) to build bus depots and passenger terminals. Accounting rules typically require companies to carry such assets on the balance sheet at historical cost, not current appraised value. Since some of this land had been bought as far back as the 1950s, this practice dramatically understated how much it was worth. 

Real estate that might have initially cost perhaps $100 an acre could have since appreciated to $10,000 an acre. But nobody paid attention to Greyhound’s landholdings. They valued the company solely on the earnings potential of busing travelers from one city to another. The land only held value for stockholders if it was sold. 

And that’s exactly what the small group of investors had in mind. They believed that Greyhound’s land was worth more than double the company’s entire market value. So the investors reasoned they could take it private, sell the land to private developers at the current going rate, and walk away with a fortune. 

With everyone else still selling, they quietly began amassing huge blocks of shares. Of course, such plans don’t stay secret long. Pretty soon, the market adjusted and the stock price began to reflect the value of these “hidden assets.” Within a couple years, a Canadian transportation company acquired Greyhound for $6.50 per share.

Those who spotted the opportunity early pocketed a 333% gain. 

These scenarios don’t play out every day. But they are far more common than you might think. 

Smart Investors Look Beyond The Bottom Line
By definition, “hidden” assets aren’t readily apparent to most investors. That’s usually because the market is preoccupied with other facets of the business. Take discount retailer Kmart. For years, the company waged a long and bitter war with rival Wal-Mart (NYSE: WMT). It finally surrendered in 2002 and filed for bankruptcy. 

About that time, a hedge fund manager named Eddie Lampert began investing heavily in Kmart debt. Those bonds were later exchanged for equity. And when the company emerged from bankruptcy the following year, Lampert became the controlling shareholder. 

Many people thought he was crazy. After all, Wal-Mart hadn’t gone anywhere, so what made him think this time would be different? But just like Greyhound, Kmart owned a ton of real estate. One of Lampert’s first moves was to sell 68 stores (mostly to Sears and Home Depot). Those transactions netted $850 million in proceeds — about what the entire chain of 1,500 locations was thought to be worth in bankruptcy court. 

Two years later, the former debt-ridden company held $4 billion in cash.

If You Don’t Own This, You’re Missing Out
My point is this… real estate is often the most valuable asset investors somehow seem to overlook. And whether it’s a struggling company with hidden real estate assets like the ones I just mentioned — or a publicly-traded play on real estate that’s available to everyday investors — most investors completely miss out on the income and growth potential real estate can bring.