Tag Archives: Net-Nets

Another Battle In The Long War: The Solitron Shareholders Meeting ($SODI, #corpgov)

Something that has been impressed upon me over the years as I learn more about business and investing has been the invaluable role that bullshit-detection plays in money dealings. The jungle is everywhere and while man may have found a way to tame his baser desires and impulses enough to enjoy a broad civilization, individual men will always tease the edges of appropriateness by attempting force by other means, namely deceit, misdirection, opacity, feigned confusion, intentional blundering, etc. If you can’t smell bullshit and if you have no means to fight back against a bullshit-peddler, he will run you over and probably try to take you for all you’re worth along the way.

Some people say, “That’s just business!” but that’s been invalidated by numerous contrary, personal experiences where no bullshit occurred and business occurred nonetheless, and more efficiently and for more wealth for both parties, overall. Bullshit is just a grey-area form of aggression, a remnant of the jungle from which we can never fully emerge.

My attendance at the first annual Solitron Devices shareholders’ meeting in nearly 20 years was a descent into that jungle. Here I and several other shareholders came face-to-face with Shevach Saraf, President, Chairman of the Board, CEO, CFO and, among many other titles and distinguishments I should say, a highly intelligent, sophisticated bullshitter.

My personal predisposition is to assume a person is trustworthy until they demonstrate they clearly are not. This is a little different than treating a person as trustworthy– I maintain skepticism and try to be alert at all times, but I don’t start a person at 0 and then work up to 100 on a “trustworthiness” scale, but rather the opposite. As a result, in dealing with Saraf and other representatives of the company in the past, detailed at considerable length here in the past (1, 2), I tried to explain various indiscretions, unkindness and general belligerency displayed by these parties in terms of misjudgments, misperceptions and a potentially historical apprehensiveness, rather than some kind of malintent.

At this point, the veil has been lifted for me and I believe I can confidently state that the bullshit is a calculated tactic and it is laid on, thick, with due purpose.

In the particular case of the shareholders’ meeting, the bullshit started with the “rules for the meeting”, which restricted each participant to a maximum of two questions no longer than one minute in length, with a twenty minute maximum duration. As with most bullshit, this was done in the name of “giving everyone a chance to speak”, but was really a rather naked attempt to intimidate shareholders and prevent them from stating their minds and engaging in significant follow-up questioning. No shareholder present (all 9 of us!) ever demonstrated any concern about domination of the Q&A period by any other shareholder. At the end of the Q&A, Saraf attempted to enforce the twenty minute maximum but was ultimately stymied by a shareholder who requested a longer, informal, follow-up Q&A period, which after 5 minutes of deliberation outside the room with counsel, was ultimately granted.

The second strand of bullshit is woven through the scandalous insinuations that Saraf made of his shareholder base. He deemed it fit to specially remind the gathered investors that he had no plans to do anything illegal and so he would not offer any insider info during the meeting. This is a strawman Saraf seems to trot out often– ask the man anything about the company at all, no matter how innocent and legally-sanctioned it may be, and he proceeds to launch into accusations of villainy aimed at getting an illegal upperhand while putting himself and the company in legal jeopardy. He also made a warning about supposed shadowy elements that were spreading false rumors and lies about the company on the internet, but he did not think to mention who was doing this or what specific claims were made which he could clarify as to their falsity. The impression one is left with is that there are no false rumors or lies being spread and this is yet another attempt to intimidate via bullshit.

Then we had to wade through Saraf’s numerous self-contradictions and general evasiveness in answering questions, most of which began with the expression, “Let me put it this way…”, which in my experience has always preceded a barely-obscured threat, as in, “Let me put it this way, if you don’t do what I am asking you to do, someone might get hurt.” The infamous EPA liabilities which have left the company hamstrung to do anything with the company’s excess capital and which according to regulatory filings earlier in the year seemed to have been extinguished, or due to be extinguished completely, by or around March or April of 2013, were suddenly at one point 30, another point 60 and another time some 72 days away from being resolved.

More bullshit: Solitron has a “sunset technology”, but there’s also the possibility they spend $5M+ of the company’s cash stockpile retooling their factory for new silicon wafer standards; the sequestration has been bad for business, but the company has also gobbled up marketshare from competitors who have gone out of business; the company is at 50% of plant utilization, but wars in Syria and elsewhere are good for business because it means equipment will need to be replaced that Solitron services; the company has struggled with rising inputs costs, but they build everything on spec and have a guaranteed profit-margin built in by the Pentagon; shareholders are now “welcome to contact any board member and ask them questions about the company” but in the past “PLEASE KEEP IN MIND THAT ALL INVESTOR COMMUNICATIONS SHOULD BE DIRECTED TO THE CHAIRMAN OF THE BOARD OF SOLITRON DEVICES, INC.“; Chinese and COTS parts have created huge price competition for the firm, but the firm’s buyers actually require specially-tested, high quality parts only Solitron can produce, and new DNA-marking of chips prevents the use/substitution of foreign knockoff parts, etc. etc.

I could go on and on. The point is it’s just a bunch of bullshit.

And Saraf isn’t the only one peddling it. His vaunted board showed their own knack. Saraf was asked, as a large shareholder, if he was concerned about the price of the company in the open market hovering around cash value. Not only did he evade the question and not answer it, but his new appointee, Mr. Kopperl, piped in with the pithy “Does anyone really know what moves stock prices?” When asked how he makes his investment decisions, Mr. Kopperl said, “Sometimes I buy value, sometimes growth.” But if no one really know whats moves stock prices and you’re philosophically agnostic as to what kind of decisions a company could make that would be good or bad from a valuation standpoint, how could you even invest?

And how would this bolster the company’s claim that the current composition of the board represents people capable of maximizing shareholder value?

It was suggested to Saraf that more disclosures from the company about its business would help the market better understand the company and its prospects and arrive at a fairer valuation. Saraf did not acknowledge whether this transparency would be beneficial to shareholders interested in seeing the marketplace better assess the company’s prospects, but he did say that he wasn’t interested in putting out a press release every time the company got a new certification or secured a contract. Bullshit!

The most puzzling event of the day was the withholding of votes for Schlig and Davis (and their subsequent dismissal with no replacement nominees named), and the approval-by-vote of the two new directors, Gerrity and Kopperl. These guys are black boxes as far as I am concerned. They sound like country club buddies and there was no explanation as to why they were qualified to represent SHAREHOLDER interests though, Saraf was quite clear, their industry experience made them qualified in his mind to represent company interests, which essentially means Saraf’s interests as things have been run so far.

Large shareholders seem to be more confident. They’re convinced Saraf is more cooperative than he seems and that he will do the right thing when it’s the right time to do so. I think the laws of the SEC are a legal cover for bullshitmongers. From where I stand, it’s an almost impenetrable fog. But maybe when you own 5% or more, you have other methods of cutting through the bullshit.

It is indeed going to be a Long War without them.

If you want more, here’s Nate Tobik’s take at OddballStocks.com.

Does Net-Net Investing Work In Japan? (#JNets, #valueinvesting, #Japan)

If you took a look at the companies I purchased off my Japanese net-net (“JNet”) worksheet about six months ago, you’d probably conclude net-net investing doesn’t “work” in Japan, at least not over a six month period. The cheap, crappy companies I bought then are cheaper, still crappy companies today.

However, if you took a look at all the companies I didn’t buy from my list, you might get a different impression altogether. While there are a few companies of this group whose fundamentals worsened and/or whose stock price fell, most are up anywhere from 10-15% with several up substantially more, 30-50%. About 10% of the total list seems to have gone private as you can’t find financial info nor trade the symbol any longer, which in my experience in JNet-land typically means they received an MBO.

And if you look at an entirely different list of JNets I generated about two months ago (because all my original picks were no longer JNets), which I finished researching one month ago and which I failed to do anything about until yesterday, the story is even better (or worse, if you’re me). How would you like to see the top pick on your list closed up 25% the day prior and about 40% total since you composed your list? How would you like to see the average company on your list priced 15% or more higher from where you first researched it, meaning you could’ve locked in your 15% annual return for the year in a few months time?!

Once again, this list also had several symbols which no longer trade, presumably because they received buyouts or other going private transactions.

So, in the last few days I learned a few things about JNets:

  1. They “work”
  2. The “M&A activity in Japan, particularly in the small cap space, is a non-starter” claim, is a myth
  3. Even crappy businesses with cash-rich balance sheets are moving like hotcakes in Abenomic Japan
  4. The strengthening of the dollar against the Yen does impact your $ returns, but so far Yen prices on JNets have outpaced the move of the Yen against the dollar
  5. Contrary to my belief that I could take my time allocating idle capital in Japan, it now appears that time is of the essence

My old motto for JNets was, “Steady as she goes.” My new motto is, “Churn and burn” or “Turn and earn.” I’m going to be watching things much more closely than I had before.

To be clear, my experience so far has been frustrating, but it hasn’t been catastrophic as I suggested in my introduction. I have captured some of the windfall moves myself although I continue to have laggards in the portfolio, at least in dollar terms. Very few of the original companies I picked are trading lower than when I bought them, though some have not moved up enough yet to make up for the exchange rate loss. My first portfolio of JNets was bought when the Yen/$ rate was 79. It’s now almost 99 Yen to the dollar and I made my second portfolio purchase around 94 Yen to the dollar.

Overall, in dollar terms my first portfolio is up 5%, with one MBO and apparently another just recently as I found out the stock is up 43% with no ask but I haven’t found a news item explaining why yet. Several others traded above NCAV so I am culling them and putting them into new opportunities. I have not yet determined what the “secret formula” is for picking the JNets that will really take off– oddly, it was mostly the companies whose prospects seemed least fortunate that I neglected to purchase and was in shock to see their stock prices 35% higher or more. As a result, I plan on wider diversification and a more random strategy in choosing between “best” companies and cheapest stocks.

I’m sure many investors have done much better than 5% in Japan in the last half year, and many more have done better still in the US and elsewhere. This isn’t a contest of relative or absolute performance. This is simply an opportunity to settle the score and point out that yeah, Benjamin Graham’s philosophy is alive and well in Japan.

Notes – 16 Japanese Net-Nets I Put In My Portfolio (#JNets, #NCAV)

Listed below are the 16 Japanese companies that currently compose my “basket” (portfolio-within-the-portfolio) of Japanese net-nets, which I refer to as “JNets”. While most of my picks were classic Benjamin Graham-style companies trading for 2/3rds or less of their Net Current Asset Value (current assets minus total liabilities), some were selected on the basis of being a Net Cash Bargain (trading below the value of the company’s cash minus total liabilities) or as a Cash Bargain (profitable company with no debt trading for less than the cash on the balance sheet).

Strictly speaking, a Net Cash Bargain is a more conservative valuation than a Net Current Asset Value Bargain as there are more assets in front of the liabilities, while a Cash Bargain is a less conservative valuation (it may or may not be an NCAV Bargain) but typically you are getting a higher quality company with stronger earnings power as a result. As Graham noted, equities can be analyzed much like bonds and the true safety of a bond comes from the underlying company’s earnings power, not necessarily the asset values which are a worst-case fall back measure to protect against loss.

The figures in the list below are all in Yen, typically in millions of Yen besides the per share price. At the time of purchase, the approximate exchange value of the dollar against the Yen was 1 USD = 78 JPY. All figures and prices are the most recent available at time of purchase.

For comparative purposes, I summarize at the end of the list the metrics for the entire basket (as if it was a conglomeration of 100% of the equity of all companies included) as well as on an average basis as a representative for an individual company within the basket.

Links in the name of each company take you to their website, if available. Links in the symbol of each company take you to their Bloomberg business bio page, if available.

16 Japanese Bargain Shares (Net-Nets, Net Cash and Cash Value)

Name: Sakai Trading
Symbol: 9967
Industry/product: imports, exports, and wholesales chemical products, synthetic resins, and electronic materials
Market Cap (Ym): 2,210
Share price (Y): 235
Debt (Ym): 0
Cash (Ym): 2,851
EV/EBIT (10yr avg): 12.3x
NCAV (Ym): 4,973
Name: Shinko Shoji Co. Ltd
Symbol: 8141
Industry/product: sells electronic parts and equipment such as integrated circuits (IC) and semiconductor devices, liquid crystal (LC) display modules, condensers, ferrite cores, coils, power supplies, thin film transistor (TFT) thermal printers, head magnets, transformers, motors, sensors, and connectors
Market Cap (Ym): 16,905
Share price (Y): 625
Debt (Ym): 3,000
Cash (Ym): 10,610
EV/EBIT (10yr avg): 12x
NCAV (Ym): 41,899
Name: KSK Co Ltd
Symbol: 9687
Industry/product: develops computer software for various systems related to telecommunication and LSI (Large Scale Integration), provides data processing services for government and insurance group, sells OA (Office Automation) equipment and computer peripheral
Market Cap (Ym): 3,300
Share price (Y): 450
Debt (Ym): 0
Cash (Ym): 4,461
EV/EBIT (10yr avg): 1.6x
NCAV (Ym): 4,926
Name: Daichii Kensetsu
Symbol: 1799
Industry/product: constructs railways mainly for East Japan Railway, constructs infrastructure such as sewage facilities, tunnels, and waterways, builds commercial, institutional, and residential buildings
Market Cap (Ym): 15,124
Share price (Y): 685
Debt (Ym): 151
Cash (Ym): 17,230
EV/EBIT (10yr avg): 2.3x
NCAV (Ym): 19,099
Name: Choukeizai Sha
Symbol: 9476
Industry/product: publishes economics, finance, law, accounting, and tax related books and periodical magazines and business related books, operates a planning center which handles advertising on publishes,provides design & production services for sales promotion pamphlets
Market Cap (Ym): 1,434
Share price (Y): 326
Debt (Ym): 0
Cash (Ym): 2,501
EV/EBIT (10yr avg): -0.1x
NCAV (Ym): 2,933
Name: CLIP Corp
Symbol: 4705
Industry/product: operates a network of cram schools in Nagoya, operates soccer school and lunch box delivery services
Market Cap (Ym): 4,022
Share price (Y): 886
Debt (Ym): 0
Cash (Ym): 5,029
EV/EBIT (10yr avg): 0.1x
NCAV (Ym): 4,196
Name: Noda Screen
Symbol: 6790
Industry/product: processes electrical components such as plastic package substrates and printed circuits boards (PCBs), through a subsidiary, manufactures and sells screen stencils and fluoride chemical products
Market Cap (Ym): 2,849
Share price (Y): 27,000
Debt (Ym): 0
Cash (Ym): 3,641
EV/EBIT (10yr avg): -0.2x
NCAV (Ym): 4,146
Name: Kitakei Co Ltd
Symbol: 9872
Industry/product: wholesales housing materials and home furnishings based in the Kansai area, sells housing facility products such as bathroom units, wooden building materials, special wooden products, housing equipment, veneer boards, chemical products, and housing preservative agents
Market Cap (Ym): 2,963
Share price (Y): 296
Debt (Ym): 0
Cash (Ym): 5,045
EV/EBIT (1oyr avg): 16.8x
NCAV (Ym): 5,133
Name: Ryosan Co Ltd
Symbol: 8140
Industry/product: distributes electronic components, such as integrated circuits (ICs), electronic tubes, semiconductor elements, and personal computers, manufactures heat sinks
Market Cap (Ym): 47,582
Share price (Y): 1,387
Debt (Ym): 172
Cash (Ym): 36,452
EV/EBIT (10yr avg): 7x
NCAV (Ym): 92,515
Name: Daiken Co
Symbol: 5900
Industry/product: manufactures and sells metal and other material parts for building construction and exterior products including curtain rails, exterior panels, garages, and bicycle parking units, provides installation of these products and real estate leasing service
Market Cap (Ym): 2,245
Share price (Y): 376
Debt (Ym): 0
Cash (Ym): 1,753
EV/EBIT (1oyr avg): 5.4x
NCAV (Ym): 4,375
Name: Ryoyo Electro Corporation
Symbol: 8068
Industry/product: wholesales electronic components including semiconductors, sells workstations, personal computers, and printers, operates offices in Singapore and Hong Kong, trades semiconductors from Mitsubishi Electric
Market Cap (Ym): 22,205
Share price (Y): 771
Debt (Ym): 0
Cash (Ym): 28,443
EV/EBIT (10yr avg): 1.6x
NCAV (Ym): 54,847
Name: Nihon Dengi
Symbol: 1723
Industry/product: designs, constructs, and maintains integrated building management systems for air-conditioning, security, and electrical facilities, develops integrated production systems for industrial factories
Market Cap (Ym): 4,805
Share price (Y): 586
Debt (Ym): 0
Cash (Ym): 6,313
EV/EBIT (10yr avg): 4.3x
NCAV (Ym): 8,613
Name: Odawara Engineering
Symbol: 6149
Industry/product: manufactures automatic coil winding machines including micro motor, coreless motor, universal motor, and stepping motor type, provides reconstruction, repair, and parts replacement services for its winding machines
Market Cap (Ym): 4,154
Share price (Y): 650
Debt (Ym): 0
Cash (Ym): 5,411
EV/EBIT (10yr avg): 2x
NCAV (Ym): 6,423
Name: Natoco Co Ltd
Symbol: 4627
Industry/product: manufactures and sells various types of paints including paints for metals, building materials, and auto repair, manufactures high polymer compounds which are used as material for liquid crystal displays
Market Cap (Ym): 4,414
Share price (Y): 603
Debt (Ym): 0
Cash (Ym): 5,403
EV/EBIT (10yr avg): 5x
NCAV (Ym): 6,967
Name: Fuji Oozx
Symbol: 7299
Industry/product: manufactures automobile engine parts such as valves, valve adjusters and rotators, has subsidiaries in Korea, Taiwan, and the United States
Market Cap (Ym): 6,189
Share price (Y): 301
Debt (Ym): 0
Cash (Ym): 6,884
EV/EBIT (10yr avg): 1.6x
NCAV (Ym): 11,623
Name: Excel Co Ltd
Symbol: 7591
Industry/product: sells electronic products, such as liquid crystal devices (LCD), semiconductors, and integrated circuits (IC), including thin film transistor (TFT) modules, TFT-LCDs, cellular phones, car navigation systems
Market Cap (Ym): 6,208
Share price (Y): 683
Debt (Ym): 0
Cash (Ym): 6,679
EV/EBIT (10yr avg): 4.7x
NCAV (Ym): 18,574
Total Basket
Market Cap (Ym): 129,974
EV (Ym): -15,499
10yr avg EBIT (Ym): 27,046
Debt (Ym): 3,323
Cash (Ym): 148,796
NCAV (Ym): 291,244
EV/EBIT (10yr avg): -0.57x
P/NCAV: 0.45x
P/Net cash: 0.89x
P/Cash: 0.87x
EBIT yield (EBIT/Mkt Cap): 21%
Representative Company (Avg)
Market Cap (Ym): 8,123
EV (Ym): -969
10yr avg EBIT (Ym): 1,690
Debt (Ym): 208
Cash (Ym): 9,300
NCAV (Ym): 18,203

My Bizarre Treatment At The Hands of Solitron’s Board ($SODI, #corpgov)

The following events took place almost two months ago but unfortunately I neglected to write about my experiences until now.

As may be surmised from an earlier post on this blog, I have begun a minor activism campaign related to a small, publicly traded company called Solitron Devices. My previous posting reproduced the letter I sent to the Board of Directors of Solitron, recommending that they consider repurchasing some of the company’s shares with excess capital to enhance shareholder value. In response to that letter, I received a missive from the Chairman of the Board (and CEO, CFO, Treasurer, Secretary, etc. etc. ad nauseum), Shevach Saraf, informing me that my letter had been received and that my proposals would be discussed at the next meeting of the Board.

In other words, it was totally boilerplate and did not provide any kind of evidence that my proposal was being seriously considered or reflected upon. It seemed like a brush-off maneuver, especially when I noticed that the address copied onto the letter was for “FL” rather than “CA” where I am currently situated. A small detail to overlook but I believe it was something of an indicator of the general disregard with which I was to be treated going forward.

Not wanting to be a nuisance, I decided to wait several weeks before contacting the Chairman (Mr. Saraf) again, this time by phone, to try to get more color on the issue, have some questions answered and hopefully work to build the kind of trust and rapport I felt would be beneficial to seeing this proposal considered with a more serious mind. Then, I picked up the phone and called.

My call came likely after hours for the East Coast-situated Solitron Devices, but after navigating the phone tree menu I managed to connect to Mr. Saraf’s direct extension and he picked up the phone himself. He acted a little surprised to be receiving my call and in all honesty seemed confused as to who I was at first. I mentioned that I had written him a letter and he acted like he didn’t remember or hadn’t read any letters, which made me a little suspicious that perhaps he really hadn’t read my letter! But after trying to jog his memory he eventually did that “Yes, yes, I remember now… whaddaya want?” kind of thing.

I asked him if I could have more information on what the current state of discussion or consideration was with regard to my proposal and any other alternatives being considered and he brushed me off, saying that, as he said in the letter he sent me, it would be discussed at the next meeting of the Board of Directors.

I asked if this was a convenient time for him to answer some other questions I had and he recommended that I send my questions to him in an e-mail and he would address them that way. I thanked him for his time and advised I would do just that. I got off the phone and typed up a list of 15 questions I had for him and sent it off. I also included a PDF copy of my original letter to the Board of Directors since his memory seemed foggy as far as who I was and what I had proposed.

This was on July 31st, 2012. Here were my 15 questions:

  1. Capital allocation
    1. The firm has almost $8M on the balance sheet in the form of cash and near-cash short-term securities. Conservatively speaking (allowing an ample cushion for the challenges the business might reasonably be expected to face through a full business cycle), how much of this sum would you categorize as necessary working capital, capital necessary to fund potential growth opportunities and “excess capital”, respectively?
    2. You have said you haven’t spent much time thinking about IR and capital allocation. Have you considered consulting with outside help on this measure? What options do you feel you have with regards to getting assistance on improving the firm’s capital allocation process?
  2. Operations/competitive environment
    1. In previous interviews you gave to an editorial service called Wall Street Transcript over the last decade plus, you discussed the idea of R&D spending in order to remain competitive as well as explore potential growth opportunities. Does the company currently have an R&D effort (and if so, is this included in the SG&A account on the income statement?)? If it does not, do you still think such an initiative is necessary to maintain the firm’s competitive position or to realize potential growth opportunities?
    2. In interviews and company filings you have discussed raw materials costs, specifically gold and copper commodities, as one of the biggest obstacles to higher profitability. Specific language in recent SEC filings seem to indicate you are looking into cost cutting initiatives. How would the company be impacted if gold prices rose significantly over the next several years? What if the price of copper fell? What can be done to contain materials costs aside from commodity prices falling?
    3. Is MTBF (Mean Time Between Failures) still higher than competitors? What other competitive advantages do you possess?
    4. Describe your revenue and customers… how much of the revenue is “fixed” or long-term in nature and how much is “variable” and could fluctuate strongly with business conditions? In other words, how much of your business is generated by demand that is dependent upon the overall state of the economy at any given time, versus that which is generated by demand that is agnostic with regards to general economic conditions?
    5. You got rid of your CFO and took those duties on yourself. Why is this?
  3. Business/industry outlook
    1. Tell me about the 2008-2009 time period. What did that period look like business-wise from the eyes of SODI?
    2. What does this company’s business look like in 10 years, conservatively speaking (more business, less, about the same as today)? How does the industry look (consolidation? emerging entrants? technologically obsolete?)
  4. Shareholders
    1. Please comment on this, from an interview: “80% of those former unsecured creditors are current suppliers to the company.” <–Do you have any idea how many are shareholders?
    2. In one interview, you mentioned the idea that SODI could be a potential takeover candidate. Recently, you and your board adopted a Rights Agreement on behalf of shareholders, ostensibly aimed at warding off a change of control in the company. Do you feel that SODI is still a potential takeover target?
    3. In one interview, you suggested that SODI could realize some kind of synergy by merging with or acquiring an industry competitor, certain vendors or other related firms. In your mind, is there still a strong argument for this kind of strategic move with regards to merging/acquiring a competitor or vendor, and if so, what is it?
    4. What are your plans for yourself as a long-term shareholder of 30% of SODI? Are you interested in seeing the highest market value for those shares possible, within reason, or is it unimportant to you? Do you have heirs you hope to pass the shares onto in time? Is your ownership of the company part of your personal retirement planning? You made it clear in an interview that you’re aware of the market valuation of the company and you understand that the market valuation does not fairly represent the earnings power and other potential of the firm, but it is unclear what strategy you are following or intend to follow to help the market better understand the intrinsic value of Solitron Devices, which would result in substantial material benefit for you and other significant shareholders. (As an aside, I couldn’t agree more with your assertion that doing “investor road shows” to try to talk the stock up is a waste of time at best, and ethically suspect at worst– I admire your decision not to engage in such strategies for value realization as they are ineffective and short-term in nature.)

Now, let’s keep in mind a few things here.

First of all, I am not a securities lawyer. I don’t intend to put myself or an executive of a public company in a compromising position by asking them something which would constitute a request for “inside information.” I just asked what I was curious about, figuring he would know which questions he could and could not respond to and I’d learn going forward what kind of stuff was crossing the line.

Second, that being said, I think a solid majority of my questions were not things that could be construed as requests for insider info (which, again, I was not seeking, I was merely attempting to perform the kind of standard due diligence I’d perform on any investment). A lot of my questions were sourced from public documents or interviews he had given in the past which were in the public domain. They were aimed at better understanding the business– not getting an insider edge on some kind of material information or decision Saraf or his Board might be considering.

Third, communicating with someone like Saraf on these issues is inherently difficult because he plays so many roles. He is the Chairman of the Board, he is the CEO, CFO, etc., AND he is a shareholder to the tune of 30% of shares outstanding (more if you consider his unexercised options). He has a lot of competing roles and responsibilities and agendas, all of which put him in a bit of a tight squeeze when it comes to corporate governance.

Anyway, here is the response I got back from Saraf in reply to my rather exhaustive and detailed request for more information about his business:

Thank you for your interest as a stockholder of the Company.  We value hearing from our stockholders.  Under the securities rules, we cannot selectively disclose information to certain persons, including stockholders, if we are not releasing the information to the general public.  As a result, I direct you to our filings with the Securities and Exchange Commission, and in particular our most recent Form 10-K and Form 10-Q for a discussion of our financial results for the most recently completed fiscal year and fiscal quarter as well as a discussion of our liquidity and trends impacting our results and liquidity.  Please note that management and the Board periodically considers a variety of business and strategic initiatives as well as disclosure considerations and as such we will take the items noted in the letter and e-mail under advisement.

If you can’t see it, that is more boilerplate. It is hard to determine whether he actually read any of my questions from a standardized, form e-mail like that. It comes across as inauthentic as he notes that they will take issues mentioned “under advisement”, but doesn’t say which ones, why or what this even means.

There was no specific language addressing any of the many questions I raised. There was no acceptance nor rejection, nor any reason given. There was… nothing. I felt I had received the run-around once more.

This frustrated me, but I decided to wait a few days to cool off before considering my next move. I consulted with some friends and other investors with more experience than I had on these types of issues and shared my questions with them. They agreed that most if not all of my questions should’ve been answerable by Saraf and that it appeared he had simply chosen not to (even though he had specifically asked me to e-mail him my questions so he could respond to them). After considering it further, I decided to attempt to contact the “independent board members” on Saraf’s 3-man band… er, board, Jacob Davis and Joseph Schlig. According to their profiles culled from annual filings, the two board members are industry veterans and technical experts in the manufacturing processes and technologies of which Solitron Devices concerns itself.

They’re also very old and their terms as board members have all expired without renewal or shareholder action (but that’s another issue we’ll get to in a bit). A bit of creative Google searching led me to what appeared to be prior/present employment and research roles of each of the two gentlemen and, desperate to make contact, I started calling.

First, I called an organization that Mr. Davis appeared to be connected with at some point, asking if they had any contact info for him. I received an e-mail advising me that they could not hand his contact info over to me for privacy reasons. I said this was fine but asked if they could pass mine on to him with the request that he contact me. I was informed that this was acceptable and would be done.

I never heard from Mr. Davis.

Next, I called a number I had found for Mr. Schlig. Now, this part was just bizarre. The first time I called, the phone got picked up after a couple rings, but no one said anything. I could hear some breathing on the other end of the line and I started inquiring, “Hello? Hello, Mr. Schlig? Is this Mr. Schlig? Could I speak to Mr. Schlig please? I am a shareholder of Solitron Devices and would like to speak to you as a member of the board of directors about some concerns I have with the company…” CLICK! I got hung up on!!

I thought it was really odd but decided that maybe it was an accident. After all, according to the profile information Mr. Schlig appeared to be an elderly man. Perhaps he was having trouble with the phone or it had slipped out of his grasp. I dialed again.

The phone was picked up after one or two rings. “Hello?” I asked. There was no response. But clearly the phone was off the hook, as I heard the voice of a mysterious, elderly sounding woman shout, “God, these phone calls are SO… ANNOYING!” and then she mumbled something else in the background but I couldn’t hear what she said. I again began inquiring, “Hello? Hello, Mr. Schlig? Is this Mr. Schlig of Solitron Devices? Hello, Mr. Schlig, I am a shareholder of the company and I believe you have a responsibility to communicate with me. Hello? Am I to understand I am being purposefully ignored? Hello?” etc. I just kept trying to egg the other person on and get them to respond. But after four minutes of this I gave up and hung up. It was clear either the other person was more stubborn than I, or they had just taken the phone off the hook and set it down and walked away, having no intention to listen to me.

Honestly, chills ran up and down my spine at this point. I felt like the next scene in this movie would be me on the phone, trying to get to the bottom of this conspiracy as some assassins silently crept in from the hallway outside my office, looking to silence me once and for all…

But that was just the beginning of the extreme perversity of this company’s communication style with shareholders! The next day, I got an e-mail in my inbox from Mr. Saraf, which looked like this:


Thank you for your interest as a stockholder of the Company.  We value hearing from our stockholders.  Under the securities rules, we cannot selectively disclose information to certain persons, including stockholders, if we are not releasing the information to the general public.  As a result, I direct you to our filings with the Securities and Exchange Commission, and in particular our most recent Form 10-K and Form 10-Q for a discussion of our financial results for the most recently completed fiscal year and fiscal quarter as well as a discussion of our liquidity and trends impacting our results and liquidity.  Please note that management and the Board periodically considers a variety of business and strategic initiatives as well as disclosure considerations and as such we will take the items noted in the letter and e-mail under advisement.

On behalf of the Solitron Devices, Inc. Board of Directors

Shevach Saraf

Chairman, President & CEO

There’s a few things worth noting about this communication. First, it included the same nonsensical, uncommunicative boilerplate language of the previous e-mail response, as if I hadn’t read it the first time, but also came appended with the ALL CAPS NOTICE to me of how I was to communicate with the board, as if I’d miss it without it being boldly asserted like so. Second, Mr. Saraf seemed like he really wanted to play up his role and responsibilities further by amending his signature, which in the previous e-mail had just said “Shevach Saraf” but this time asserted it was “on behalf of” the board, and reiterated that he holds three important titles with the company.

My interpretation of the e-mail was… confused. I wasn’t aware of any rule or law that said one MUST communicate solely with the Chairman of the Board. And it also seemed like a Catch-22 of sorts because Saraf had just ignored my previous communications, so why should I send things through him if he was just going to ignore them?

Curious, and hoping to get to the bottom of things, I immediately picked up the phone and called Mr. Saraf, who again picked up the phone. I told him I had received his e-mail and wanted to know what the meaning of it was– why had he sent it. He played it off as if he was just trying to clarify things for me, not explicitly acknowledging the fact that it must have been prompted by his sock puppet “independent board members” tattling on my shenanigans (you know, trying to contact them individually).

From here on out, things got pretty hostile. I don’t think anyone really cares for the he said-she said blow-by-blow replay but suffice it to say, Mr. Saraf got extremely upset with me. He made it clear he thought I was a pushy nuisance. He accused me of seeking insider information and he questioned my moral character and honesty, asserting that I was attempting to mislead and manipulate him into doing something wrong for my own benefit. It was incredibly rude, offensive and it was obvious from the get-go that it was consistent with his previously established pattern of behavior, which essentially boils down to being as obfuscatory and unhelpful as possible.

But that wasn’t the best part. The best part was this little logical trainwreck of a back-and-forth:

Me: Can you tell me what the board thinks of my shareholder proposal outlined in my letter?

Saraf: That information will be discussed at the next regularly scheduled board meeting.

Me: Well, when is the next regularly scheduled board meeting?

Saraf: That is undecided.

Me: Well, how is it a regularly scheduled board meeting if it’s not on the calendar and you’re currently undecided about it?

Saraf: I can not give you special information about when the company will be holding its meetings!

Followed by this:

Me: Okay, I understand you refuse to answer any of the questions in my e-mail and you don’t want to tell me when the next meeting of the board is. Can you at least tell me when the next shareholder’s meeting will be held?

Saraf: The date for the next shareholder’s meeting will be determined at the next meeting of the board. It is up to our sole discretion as members of the board to determine this. I can not give you this information without sharing it with everyone else!

Me: I’m not asking you to give it just to me, I would prefer you make an announcement of this to everyone and I am just trying to understand why you won’t do this.

Saraf: Again, as I have said so many times, this is up to our sole discretion.

Honestly, I have had few occasions in my life where I have been treated in such a blatantly rude and condescending manner in general, but especially by someone who is nominally supposed to be my legal and financial representative as the chairman of the elective board which represents shareholder interests. The hostility and arrogance, the anger directed toward me for merely trying to seek simple information any concerned shareholder would want to know, was truly alarming.

Overall, it left me feeling suspicious of Mr. Saraf and his motives. If he is on the shareholders’ side, why does he make so much effort to hide and conceal information, to not announce (and apparently to not even hold) meetings of the board nor shareholders, and why does he take such a frustrated, hostile attitude toward individuals trying to understand the company? Where is the sympathy? Where is the respect for the responsibilities he has to people like me?

Solitron Devices has serious corporate governance issues. The two “independent” board members, Jacob Davis and Joseph Schlig, appear to be little more than personal flunkies of Mr. Saraf, who sit on the board at his pleasure solely to make it appear as if the company has a board, when in reality Mr. Saraf appears to be not only the king, but the jury, judge and executioner. This appears to be the primary reason why this company is cheap and I believe the value will remain locked until the corporate governance issue can be busted open in favor of the shareholders’ at large.

Geoff Gannon Digest #5 – A Compilation Of Ideas On Investing (@geoffgannon)

The “Geoff Gannon Digest” is a series of posts highlighting some of my favorite wit, wisdom and investment advice from value investor Geoff Gannon. Each post provides a link to the parent article with bullet-pointed lists of key-takeaways from each. For the complete discussion by the original author, please click the link to the parent article.

Why I Concentrate On Clear Favorites And Soggy Cigar Butts

  • Graham and Schloss had >50 stocks in their portfolio for much of their career
  • They turned over their portfolios infrequently; probably added one position a month
  • To avoid running a portfolio that requires constant good ideas:
    • increase concentration
    • increase hold time
    • buy entire groups of stocks at once
  • With his JNets, Gannon purchased a “basket” because he could not easily discriminate between Japanese firms which were both:
    • profitable
    • selling for less than their net cash
  • Portfolio concentration when investing abroad is based upon:
    • which countries do I invest in?
    • how many cheap companies can I find in industries I understand?
    • how many family controlled companies can I find?
  • Interesting businesses are often unique

How Today’s Profits Fuel Tomorrow’s Growth

  • To elements to consider with any business’s returns:
    • How much can you make per dollar of sales?
    • How much can you sell per dollar of capital you tie up?
  • Quantitative check: Gross Profit/ ((Receivables + Inventory + PP&E) – (Payables + Accrued Expenses))
  • Once an industry matures, self-funding through retained earnings becomes a critical part of future growth; it’s the fuel that drives growth
  • A company with high ROIC isn’t just more profitable, it can more reliably grow its own business
  • Maintaining market share usually means increasing capital at the same rate at which the overall market is growing
  • Higher ROIC allows for the charting of a more reliable growth path
  • Industries where ROIC increases with market share present dangers to companies with low market share or low ROIC
  • The easiest place to get capital is from your own successful operations; tomorrow’s capital comes from today’s profits

Why Capital Turns Matter — And What Warren Buffett Means When He Talks About Them

  • Capital turns = Sales/Net Tangible Assets
  • Buffett nets tangible assets against A/P and accrued expenses; gives companies credit for these zero-interest liabilities, rather than assuming shareholders pay for all of a company’s assets
  • Buffett’s businesses tend to have higher sales per dollar of assets
  • Companies with higher sales per dollar of assets have higher ROIC than competitors even if they have the same margins
  • There’s more safety in a business in an industry with:
    • adequate gross margins
    • adequate capital turns
  • Industries dependent upon margins or turns open themselves to devastating attacks from the player who can maximize key variables you control:
    • price
    • cost
    • working capital management
    • etc.
  • Companies often compete on a specific trait; it has to be a trait that is variable and can be targeted for change

How to Lose Money in Stocks: Look Where Everyone Else Looks — Ignore Stocks Like These 15

  • It’s risky to act like everyone else, looking at the same stocks everyone else looks at, or by entering and exiting with the crowd
  • Don’t worry about which diet is best, worry about which diet you can stick to; find an adequate approach you can see through forever
  • Having Buffett-like success requires every day commitment
  • You should aim to earn 7% to 15% a year for the rest of your investing life if you aren’t going to fully commit like Buffett did
  • A good investment:
    • reliable history of past profitability
    • cheap in terms of EV/EBITDA
    • less analyst coverage
  • A list of such stocks:
    • The Eastern Company (EML)
    • Arden (ARDNA)
    • Weis Markets (WMK)
    • Oil-Dri (ODC)
    • Sauer-Danfoss (SHS)
    • Village Supermarket (VLGEA)
    • U.S. Lime (USLM)    
    • Daily Journal (DJCO)
    • Seaboard (SEB)
    • American Greetings (AM)
    • Ampco-Pittsburgh (AP)
    • International Wire (ITWG)
    • Terra Nitrogen (TNH)
    • Performed Line Products (PLPC)
    • GT Advanced Technologies (GTAT)