Sunday, March 15, 2020

People, Let's get a Grip!

Happy Sunday everyone. I just had to get that out of the way!

The hysteria around where I am, is almost laughable. People are hoarding toilet paper like it will give them immunity to Coronavirus! So, get a grip!

So, I am thinking that if people hoard toilet paper as a gut reaction to a virus, then certainly everyday retail investors are capable of selling way beyond what the current situation calls for.

Unfortunately for me, I own a lot of lower-tier stocks, stocks that are in emerging markets and the cheaper stocks in developed markets. So my stocks have actually dropped farther than the market as a whole.

Below are four of my holdings. Notice that they all yield dividends way above average. All four of these companies have improved earnings. All four of these companies have increasing earnings. Tachibana Electech (8159:TSE) is in fact is a netnet. This means that it is worth more dead than alive! While I do realize that the coronavirus crisis will materially impact Tachibana Electech — the company issued a profit warning for the current quarter — nothing that happens this year should take 35% off the valuation!

Lewis Tachibana Riken EUPIC
Price R 23.81 ¥ 1248.00 ¥ 1770.00 € 3.38
Shares (M) 80.3 26 23.6 27.5
398.1 4422 3857 10.9
Marketcap (M) R 1911.94
($ 117.30)
¥ 32448.00
($ 306.11)
¥ 41772.00
($ 394.08)
€ 92.95
($ 103.17)
ROE 8.3 6.3 8.3 8.3
PE 4.8 7.3 10.8 8.5
PTBV 0.43 0.46 0.96 0.79
Div Yield 10.46 3.85 2.2 3.85
Price /
- 0.73 1.36 -
I am posting this table to share and also to remind myself that we shouldn't pay attention to the markets because the fundamentals reflect the value of shares, not the market whims.

While we always suspect the market is due to get a shock that will cause a drop, where the shock comes from is near impossible to guess with any certainty. I never thought that when the 10 year run ends, the shock would come not from geopolitical or world economic events, but from a germ!

In 2009 when the world was suffering a financial meltdown, I read up on the great depression, and tried to draw parallels. I found there weren't that many similarities.

Fatalities % of World
1918 Flu 50 M 3
1958 Asian Flu 2 M 0.06
1962 Hong Kong Flu 50 M 0.03
2020 Coronavirus 10,000
so far
Now in 2020, the world seemingly is going through a cataclysmic pandemic, I think it pays to read up on similar pandemics of recent history. The table here shows the most deadly flu outbreaks during the last 150 years when we've had sophisticated financial markets. In that time, I can safely say that these worldwide health crises have not had a negative impact on world economic growth. World War I and the 1918-1919 influenza pandemic did not prevent the roaring twenties. The two pandemics in the 50's and 60's did not affect Warren Buffett's generation in the least bit.

Sure, the world economic output could be reduced significantly because of the Coronavirus, but probably only for two quarters. China, the vanguard in this crises, is already starting to stabilize its new infection rates. I wouldn't be surprised if things go back to 3-6 months there. And my feeling is the lessons learned when this crises is over will spur new economic activity in the health care and infrastructure sector to prepare for the next one. Also, lost production can be recovered when the world consumer market returns back to normal.

But many in the world will not try to rationalize the situation and instead make a sport of hoarding toilet paper and other necessities. It is in our human nature to do something active when danger is lurking and is out of our control. And really there is no harm in doing so. However, the same mentality cannot apply to retail investing, because the market will be rational in the end.

Today, the S&P 500 is down 25% from the peak because of a germ. I think this is definitely the time to be contrarian like Baron Rothschild, who famously said: "Buy when there's blood in the streets, even if the blood is your own.".

Wednesday, March 11, 2020

My Views on IEH Corp

Hi all, in the last year since I've been mostly silent, I've received the most inquiries about IEH Corp (OTC:IEHC). I have attended a number of the annual shareholder meetings and today I am going to give an update on how I see things. Note: the text below are my impressions and opinions and recollection of conversations, take everything in here with a grain of salt. And with that out of the way, let's dive in.

My impression from the meetings generally aligns with the market perception. The company is hitting a very good spot and things are generally on the up and up. Just look at the last seven years' revenue numbers below.

The CEO though, constantly reminds us that their customers are long-term customers and they are slow adopters. This means that it takes a long time to bag a new customer but when they do they stay as customers. A new customer must design in these hyperboloid connectors, and once they do they are hard to substitute.

So, sales improvement in this company take time. And one can expect more years of revenue increase. That said, there is also a limit to how much the company can sell. This is not a company making technological breakthroughs. Instead, it is a niche provider riding on society's increasing reliance on technology in more and more rough and extreme environments. Their technology is not new, in fact it is old enough to be out of patent protection.

Their main customers are the big drivers of our economy: defense, old and gas, commercial aerospace and the medical field. So long as the S&P 500 does well, so will the company, provided it can execute.

And execution is the main thing I am monitoring during my yearly visits. The company of course, has a very long history with a single family, the Offermans, as owner-operators. Recently, the fourth generation of the family has taken the helm. I am very pleased with this change. The current CEO, David Offerman, has taken the helm for three years. In that time, I just feel things look better to us shareholders. Firstly, the governance wasn't impressive, their non-executive board members did not even reside near the company and dialed into every board meeting. With some shareholder prodding, they have added more conventional and local people for board members.

The previous CEO, Michael Offerman, had also relied on a small-time accounting firm to do their books and inventory. This firm was replaced by a related accountant who was also a small operator. Last year, that accountant left. Incidentally, that second accountant attended the last shareholder meeting to tell everyone that it was all an amicable break. As I remember, he said that he liked the job but in the end he felt that he was too small to handle the task. And so, we are here today with a more traditional firm Marcum LLP as accountants.

Shareholders in past meetings have also expressed concerns when retained earning for grew several quarters as IEH had good numbers, but the value all just went to more inventory, instead of more cash. Furthermore, in the last meeting one shareholder pointed out that the company wrote off $400k in inventory for 2019, whereas was it was only $200k for 2018. So many shareholders are looking at the inventory and pressing for improvement.

On the positive side, in the last shareholder meeting I heard that the company was moving to SAP software. I also noticed the company hired a new, and much younger, controller. And the new controller just happens to specialize in SAP. I would expect that with this and the accounting changes we will see improvements in inventory controls and hence better margins.

So with the new CEO in this fourth year, I am watching for inventory levels and margins. My best scenario is that inventory stays flat and there are no significant write-offs, and margins continue to improve. The CEO used to be in charge of sales and clearly has done a great job in the sales department. By showing better control of inventory and margins he will be able to keep up the earnings growth. In the last seven years that I have owned this stock, I have seen annual EPS go from $0.63 to $2.15. Of course, as most people know, the unusual spike in sales last year was due to a single customer order. That customer had decided to switch to hyperboloid from a cheaper technology. But no single customer contributes more than 14% of revenue, so even if this customer cut off all future orders, the company is still growing at a goodly pace.

Price 17.40
Shares (M) 2.32
(2.74 fully diluted)
Equity (M) 26.20
Earnings TTM 3.71
Marketcap (M) 40.60
ROE 14.1
PE 10.9
PTBV 1.55
The previous year spike also contributed significantly to operating margins. The operating margin for the last five years are 20%, 16%, 14%, 19% and 27% in 2019. Other than the previous year, the company has never achieved margins over 20%. If the company can be a bit more consistent and keep the margin say, at 23%. I would feel confident that things have really changed to take this company to the next level; the CEO has indicated that he wants to take the company back on to the Nasdaq someday.

And so, having weighted all these thoughts, I feel that the company at $17.40 today is about fairly priced. I know the stock was at a high of $25, reflecting the rich valuations of stocks everywhere. But I feel IEHC has to have another good year, maybe not as good as 2019, to deserve a price over $20. That said I did not sell at $25 because there is just too much upside. Like I said earlier, one really has to be patient with this stock. And if the stock drops under the $14 - $13 range, I definitely will start buying more. At $12, I would back up the truck!

Tuesday, December 31, 2019

My Annual Schedule of Investments

Happy New Year!

A whole year without a post! Well, it reflects my investing attitude in the year. I haven't traded much. I have added significantly to two positions: KCLI and PM. But probably for the time, I have not opened any new positions. PMI and MO - the two Philip Morrises - announced briefly that they were in talks to re-merge. But that got shot down quickly. I PMI bought just after the announcement when it was not well received. It dropped to $72 from $80 when I bought, now it is at $86.

For my holdings from a year ago, use this link.

Long Position Category Business Holding
IEH Corp (IEHC) US MicrocapManufacturing 6 ½ yrs
Anthem (ANTM) US Large capHealth insurance 15 yrs
Kansas City Life (KCLI) US smallcapLife insurance 5 yrs
European Reliance (ATH:EUPIC) Greek smallcapInsurance 5 ½ yrs
Tachibana Eletech (TSE:8159) Japanese smallcapElectronic Distributor 6 ½ yrs
Seaboard Corp (SEB) US Mid capFood Conglomerate 14 yrs
Senvest Capital (TSX:SEC) Canadian smallcapInvestment Company 4 ½ yrs
Installux SA (PAR:Stal) French microcapManufacturing 6 ½ yrs
Riken Keiki (TSE:7754) Japanese smallcapManufacturing 6 ½ yrs
Pacific Healthcare (PFHO) US MicrocrapHealth insurance 5 yrs
Philip Morris Int. (PMI) US LargecapTobacco 19 yrs
New Century Hong Kong (HK:0234) Hong Kong smallcapHotel, cruise line 5 yrs
Bruce Fund (BRUFX) Mutual fundMid-cap value 12 yrs
McRae Industries (MCRAA) US Microcap Footware 7 yrs
Lewis Group (JSE:LEW) S Africa midcap Furniture Retail 4 yrs
Short Position
S&P500 E-mini (CME:ES) Index Futures 2 yr
Direxion S&P500 Bear (SPXS) ETF 3x Inverse ETF 1 yr

Note this year I continue to hold two market short positions. They have been hemorrhaging money. I take solace in the fact that the higher they go, they more they are likely to make money.

To me, the US public markets are just too mature and saturated. In the coming decade or two it will only yield around 3-5%. I think people look back to the good old days when value investors prospered, like in the 50s to the 90s. This was a time when investing isn't as hot a thing as it is now. In the coming years I believe money will chase other areas, like foreign markets, developing markets, and private equity.

Despite not much activity on my part, there are still some things that I'd like to post but just didn't have the time. Things I would have like to write about are:
  • Adrenna Property Group screwing the small minority shareholders like me royally.
  • New Century Group HK majority shareholders extracting HK$497M (US$63M) cash from the company.
  • IEH stock, revenue and profits did great. But the CEO also got a generous option package that could give shareholders 10% dilution.
  • My chess sucks. But playing chess is serving it's purpose. It has distracted my overactive mind from making impulsive moves with my porfolio.

Happy new year and may 2020 be a happy and prosperous year.

Tuesday, December 25, 2018

My Annual Schedule of Investments

Merry Christmas and happy new year!

Another year has come to an end and again it is time to list my largest holdings. This year I also disclose the approximate time that I have held the oldest shares in these holdings. A lot of these stocks I have bought and sold repeatedly over the years. So, although you may see a chart has risen spectacularly through my holding period, I probably did not profit as much as you think because I may have reduced a position before the best times or increased a position too late to catch all the upside. Nonetheless, I find the holding period information very useful to put a perspective on my investment strategy through the years. For example, it has made me much more forgiving of my mistakes. I have been kicking myself for reducing some positions before some great gains (IEHC). But I see now that I also had the wherewithal to hold on to some stocks for over a decade, which turned out to be great calls.

For my holdings from a year ago, use this link.

Long Position Category Business Holding
Anthem (ANTM) US Large capHealth insurance 14 yrs
Kansas City Life (KCLI) US smallcapLife insurance 4 yrs
IEH Corp (IEHC) US MicrocapManufacturing 5.5 yrs
European Reliance (ATH:EUPIC) Greek smallcapInsurance 4.5 yrs
Tachibana Eletech (TSE:8159) Japanese smallcapElectronic Distributor 5.5 yrs
Senvest Capital (TSX:SEC) Canadian smallcapInvestment Company 3.5 yrs
Seaboard Corp (SEB) US Mid capFood Conglomerate 13 yrs
Installux SA French microcapManufacturing 5.5 yrs
New Century Hong Kong (HK:0234) Hong Kong smallcapHotel, cruise line 4 yrs
Riken Keiki (TSE:7754) Japanese smallcapManufacturing 5.5 yrs
Pacific Healthcare (PFHO) US MicrocrapHealth insurance 4 yrs
Karelia Tobacco (ATH:KARE) Greek smallcapCigarettes 4 yrs
McRea Industries (MCRAA) US MicrocapFootwear 6 yrs
Bruce Fund (BRUFX) Mutual fundMid-cap value 11 yrs
Short Position
S&P500 E-mini (CME:ES) Index Futures 1 yr
Direxion S&P500 Bear (SPXS) ETF 3x Inverse ETF 1 mon

Note this year I also listed my first two significant short positions. I explained in previous posts why I am bearish on the US market, and to a lesser extent, the whole world.

And finally, I should mention that I opened a large position in Folli Follie (OTC:FLLIY) late last year. I did not do a writeup because I cut corners and didn't do enough of my own research. I was going to get around to it. But before I could, everything went south for this Greek company. The world found out that the company founders and insiders have been committing massive fraud. Nine insiders have been fined already and they are currently facing fraud and money laundering charges. I hope they go to jail and pay restitution to the innocent shareholders like me. The stocks I still own are down 85%! That's all I can say for now. The loss is probably my biggest ever and dwelling too deeply can serve no constructive purpose.

But let's hope that next year brings us all better results! cheers!

Thursday, November 15, 2018

Why I Shorted the S&P500

The S&P 500 now has returned around 0% this year-to-date. This is Trump's second year in office and the euphoria from his economic policy changes has worn off. As I mentioned throughout much of the year I have had a significant short position on the S&P 500 index. So I have luckily come out slightly ahead in this position. So effectively I am running a long-short portfolio. Counting only my long positions, I am very much at less than 100% invested in stocks. And counting the short position, I am at even less exposed to the market. So, the purpose of the short is to remove my exposure to stocks since my primary market, the S&P 500, is way way overpriced. In this way I can still play the stock picking game while at the same time shield myself from the correction that I feel is just around the corner.

I have seen two major US corrections and I have come to realize, by living in the US, that the euphoria for the markets is bound to come once or even twice every generation. I am seeing another case now. The US is simply at an unsustainable level. My reason for this is grounded on the principle that a stock investment should be based on the value of the company. And this value is the present value of all future cash flows. This is a basic value investing principle.

So the S&P500 index should be priced at the present value of the cash flows from of its constituent companies. The latest TTM earnings of the S&P 500 is only 122 whereas the index is at around 2700 today. That means the entire index is trading at PE of 22! This is way over the normal traditional range of 15. And 15 is being very generous. I want to use this latter PE multiple to help get an estimate of the potential return of the S&P500 over the near future, say 10 years.

The future cash flows of a stock, which reflects the value, is somewhat reflected by the earnings of that stock. If the earnings grow by a certain percentage every year, then the value of the stock should grow by that amount also. I will be generous and say that the S&P500 will grow earnings by 5%. I will also be generous and say that the S&P500 will yield 2%. Therefore, from just this data, we can see that the S&P500 will return around 7%. Not bad but not great either considering I keep hearing returns have traditionally been around 10-12%.

But there is still a flip side to the investing reality: the index is at a very high PE multiple now. It must return to more normal levels. Say it returns to a more traditional, albeit still elevated, level of 15. That means for the same earnings, the stock prices will have to drop to 68% of the elevated level! If this happens in 10yrs that is an annual drop of 2.5%. That is a lot considering that the return I just derived was only 7%.

And wait, it gets worse.

All investors will constantly face three impediments: inflation, taxes and fees. So far, I have not mentioned them in calculating returns. Firstly, there is inflation. Inflation is a fact of life and is often ignored when talking about returns. The reason for this is that inflation varies from year to year and to simplify discussion, we talk in terms of nominal returns. Nominal returns are the opposite of real returns which factor in inflation. The 10-12% return commonly touted is always the nominal amount.

The second impediment is taxes. We can avoid this temporarily by investing in tax-sheltered retirement accounts, but there is a limit to how much we can put in such accounts. We can also reduce it by holding stocks for a long time, if not forever. And there must be many other creative ways of avoiding it, for example by cheating on taxes. Because of this variability, I will only look at dividends, which is forcibly taxed. Suppose the tax rate on dividends is 30% and suppose that half of one's portfolio is not tax sheltered. Then using the 2% dividend number, we will pay 0.3% of our portfolio into taxes.

Earnings growth +5%
Dividend yield +2%
PE shrinkage -2.5%
Taxes on dividends -0.3%
Net return 4%
10 yr net return 48%

Thirdly, there is the fees. This is the most manageable impediment. How much one saves depends on how much effort one expends. I depend on myself for all my financial decisions, I hardly own any funds or ETFs. Therefore, the only fees I pay are transaction fees, currency exchange fees and travel costs to visit companies. All this I estimate is only 0.2% of my portfolio. And subtracting all this up gives me a net return of 4% per annum or 48% per decade. See table. I bet this will be an incredibly low number compared to the average retail investor's expectations. In the long term, stock prices will be grounded by the PE ratio. When the current euphoria subsides and reality sets in, the mood of the market will probably cause prices to fall significantly below the 4% estimate, maybe it could even turn negative at the end of ten years! In the given calculations, I said that the PE shrinkage from 22 to 15 would reduce returns by 2.5%. If the PE goes from 22 to 11.5, the nominal return would not be 4% but 0%!

It is easy to see why I shorted the S&P500.

Sunday, July 1, 2018

Portfolio Update

This blog is so devoid of recent entries that I felt compelled recently to post something, anything. Fortunately I have a lot of odds and ends I can update on my portfolio and the market in general.

After riding high under Trump for a year, I am convinced the US market cannot go any higher. The Shiller PE ratio is at a mind boggling 32.3! That is higher than anytime before the great depression and is only surpassed by the dot-com bubble in 2000. On the other hand, I have holdings that are still reasonably valued overseas and even some in the US. Plus I hate paying capital gains taxes. So, instead of selling a lot I settled on hedging the US market. After all, this is a perfect time to short the US market if I am convinced it cannot go any higher.

I hedged the US market by shorting the S&P500 mini futures. Each of these futures is a contract to buy or sell a contract that will pay out $50 times the S&P 500 index on the delivery date. So suppose on the contract expiry the S&P500 is 2700. Then the contract would conceptually pay out $135,000. In reality the contract settles financially everyday, so the original purchase amount and the settlement payout do not happen but instead the delta in the value of the contract is debited or credited at the close of each trading day. So far I am turning a profit shorting the mini futures. However, I really prefer that were not the case, as each gain means an overall downward bias in my portfolio. But it only confirms my belief that the market cannot go any higher.

 A Prussian general once said that "No battle plan survives first contact with the enemy". I feel that way looking back at my first merger arbitrage situation , between Anthem and Cigna. As it turned out, all the forecasts about its chances of success were too optimistic. The merger fell apart after various state governments voiced objections and sued to block it. Despite this, I fell into the golden period for managed care organizations and both companies rose handsomely. I have since sold my Cigna shares. So the moral of this story is that with careful thought and due diligence, even if I am wrong in my predictions, I can still come out ahead. The S&P 500 hedge is another play from this same playbook.

In addition to the hedge I have also reduced my exposure to US companies whenever he opportunity arose. This was the case with IEHC and Senvest.

While the S&P 500 and my US holdings have done wonderfully since Trump's presidency. My international holdings are a mixed bag There have been laggards such as Lewis Group of South Africa. And there are some wonderful stocks, such as Installux, European Reliance, Tachibana Eletech and Riken Keiki. I have listed the basic metrics of some of my international holdings below.

Tachibana Riken EUPIC Installux Lewis CMH
Price ¥ 2028.00 ¥ 2504.00 € 3.47 € 415.00 R 31.20 R 27.50
¥ 51105.60
($ 461.66)
¥ 58092.80
($ 524.78)
€ 95.43
($ 110.79)
€ 125.83
($ 146.09)
R 2602.08
($ 190)
R 2057.00
($ 150.2 )
ROE % 6.4 11.2 13.8 9.7 4.8 35.6
PE 13.1 14.1 6 14.5 9.9 8.3
PTBV 0.84 1.67 0.94 1.39 0.49 2.97
Yield %
1.97 1.2 3.46 1.93 6.41 5.85

Note that all these companies, with the exception of CMH of South Africa, all have very little debt. The companies whose stock appreciated significantly did so with a combination of increased profits and multiple expansion. I am still waiting for that to happen in my South African stocks. I have not wavered in my belief that the long term future of world economy is in the emerging markets. But in the meantime while I wait, they are yielding 6%.

Thursday, March 1, 2018

Why I Bought Adrenna Properties

Once in a while a company a catches my eye because of its performance relative to price. But the company ownership structure makes it not feasible to buy. I remember one German company I saw once with very attractive returns relative to stock price, but it is 99% owned by a single entity. So I didn't want to buy because the price does not reflect the fundamentals but whatever a few small retailers value.

Recently I found Adrenna Property Group (ANA:JSE). Adrenna is a South African Property investment company. Its properties are business and residential held for rent buildings in the Cape Town area. Cape Town is the capital of South Africa and is a relatively affluent city in South Africa.

The whole Adrenna story started in 1999 when the Quyn Group first listed on the Johannesburg Stock Exchange in 1999. At first it was a recruitment and outsourcing company. Then Quyn acquired the Colliers group of companies in South Africa and changed its name to Colliers South Africa Holdings Limited. Initially the combined company struggled and decided to delist in 2004. Later, after some major restructuring and some decent results, the company changed its name to Adrenna Property Group Limited in February 2012, and it relisted on the JSE.

From that time onwards, the Adrenna has steadily improved its results. And that caught my eye. The following shows the results in the years following the relisting. All monies are in units of millions. Note that the company has consistently reduced debt while increasing equity through fair value appreciation. The capitalization rate is the net operating income before interest and revaluation divided by the property value.

TTM 2017 2016 2015 2014 2013
Price R 1.00 R 1.55 R 0.65 R 1.45 R 0.80 R 0.40
Shares 55.9 55.9 55.9 55.9 55.9 55.9
Equity 151.1 146.5 125.4 117.6 110.1 98.2
Earnings TTM 19.5 21.1 7.9 7.8 12.2 10.5
Marketcap R 55.90 ($ 4.58) R 86.64 ($ 7.10) R 36.34 ($ 2.98) R 81.05 ($ 6.64) R 44.72 ($ 3.67) R 22.36 ($ 1.83)
ROE 12.9 14.4 6.3 6.6 11.1 10.7
PE 2.9 4.1 4.6 10.4 3.7 2.1
PTBV 0.39 0.62 0.3 0.73 0.43 0.24
Div Yield 0 0 0 0 0 0
BVPS 2.7 2.62 2.24 2.1 1.97 1.76
Debt 0.4 0.37 0.52 0.53 0.63 0.84
Cap Rate (%) 8.2 7 6.7 4.8 6 6.4

The company actually has high earnings through fair value reappraisal. So beware when looking at the incredible PE numbers!

The company's cash flow mostly pays for expenses and interest on debt.  South Africa is a country with high inflation and therefore interest rates are also high. The company's operating income is 2.5 times interest expense. This ratio is a bit lower than I'd like but it is still acceptable.

So Adrenna looks very cheap, but is there a catch? And indeed, there is a problem when investing in Adrenna. That problem is the company's market cap. The company's five largest shareholders own 72% of the company. They include two board member and affiliated entities. This is encouraging in that the board has aligned interests with the average shareholder but it also means there is very little float, possibly much less than USD $1 million. Still I have built as large a position as possible without excessively moving the stock price. Hence, I regard my position in Adrenna as only a trial run of my investment approach because this is not a stock I can buy in size.