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
Earnings TTM	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 / NCAV	-	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	0.0001

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.".

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.

IEHC
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!