The Solitron Devices first [in decades] annual meeting..

"Thank you for coming here young man.." - Joseph Schlig

"It's not an us verses them…you treat shareholders like barnacles on a ship waiting to be scraped off.." - Nate Tobik

"..I think part of the problem is you've lived under a rock for the past 20 years.." - Jeff

"I'm actually surprised at how many people the company brought.." - Alex

A ying and a yang, frustrated and curt with shareholders, semi-friendly and willing to answer questions.  The Solitron Devices annual meeting was full of contrasts this morning, from grimy downtown Miami, to the nice boardroom, I could go on, let me start at the beginning.

The meeting was held in the SunTrust building in Miami.  I arrived with my proxy and was greeted by a number of lawyers at the door.  They took my ID and gave me the voting form, I voted on the spot.  I also received a set of "rules" for the meeting.

The rules of conduct set out the agenda, rules for voting, and then two contentious items.  The first states that shareholders are allowed two questions that are to be no longer than one minute long.  That's it, just two one minute questions or comments.

Before the meeting started I had the opportunity to introduce myself to most of the other shareholders present.  There were nine shareholders present, not including management.  Shareholders ranged from large holders such as Alex Toppan, and Ancora Advisors to smaller holders such as myself.  Universally everyone was excited the company had finally put something on the calendar, with the hope we'd be allowed to openly ask management a few questions.

The company came in with a posse of advisors, including the auditor, lawyers, and Board members.  As an aside, I had a chance to talk to the auditor before the meeting for a few minutes.  I asked what it was like working with Saraf, considering he is the CFO/COO/C-anything.  The auditor said he barely worked with him, instead he worked with the company's controller and accounting department, which he spoke highly of.  I think this is reassuring, Saraf isn't a one man band running the entire show, although his hands are clearly deep into all aspects of the company's operations.

The company read some prepared statements, then opened the floor for questions stating they expected to wrap up in 20 minutes, clearly not long enough to air 20 years worth of questions.

I will summarize some of the questions and answers below, but I want to point out two important points from the meeting.

The first was a short comment/question that Jeff, from Ancora stated.  Jeff stated that he'd interacted with the company multiple times, and each time became much more frustrating.  He said he felt the company had been in hiding for 20 years and suddenly they were found out.  They can't go back and hide, they need to deal with shareholders.  He gave the company a B+/A- for operations, but a D for corporate governance.  Jeff spoke for his firm, but in truth he spoke for all shareholders, he just vocalized the frustration we all have with the Board.  Jeff also asked if the company planned on keeping their auditor more than six months.  The auditor expected to stay around, but I'm sure all of their auditors had a similar expectation.

Jeff's main comment was that it was great the company was having a meeting in a nice office, but what will be different over the next year?  Will we all be sitting in the same room looking at the same numbers?  Unfortunately Saraf's answer didn't answer much of anything, instead he evaded the main question asked and answered with a non-answer.

The second item worth noting was what happened when the company tried to close the meeting down. Jeff Moore (ragnarisapirate.blogspot.com) asked if the Board would stick around for an informal conversation.  He was flatly rejected, I protested along with other shareholders.  Eventually the company's counsel asked if we could take a five minute break.  After the break the Board came back in, Saraf gave a mini speech about how he wasn't going to give out inside information, insinuating that somehow that's what we were there for, which of course wasn't true.

The informal question and answer session was the highlight of the meeting.  Management let their hair down and answered basic questions about the business, as well as a few questions regarding capital allocation.

I also had the chance to look through the shareholder register at the end of the meeting.  This was eye-opening.  The company has around 2000 record holders, 95% of them hold less than 1000 shares.  Most of the company's record holding shareholders appear to be remainder creditors from their bankruptcy, holders such as Florida Power and Light with 2,000 shares.  There were many South Florida supply companies listed on the register, along with many individuals with 100-200 shares or less.

Election Results

The company will be publishing an 8-k with the official election results, but this is what was announced at the meeting.  Shareholders voted 1,917,570 shares in total, and voted:

• For Saraf
• For Gerrity
• For Kopperl
• Against Davis
• Against Schlig

• For ratification of the CPA
• For the Say on Pay
• Voted to evaluate pay once a year

Questions/Answers

A wide variety of questions were asked, where I remember the question I have it noted, otherwise these are just general answers and notes I took.  Jeff, and Taylor (http://valueprax.wordpress.com/) might remember more, I'll let them fill in additional details.  The answers are mixed with some commentary, none of these are direct quotes as far as I can tell.

• Is there a succession plan in place?
• There is a layer of management under the CEO, including the Controller, but otherwise all of the titles mentioned have no place in replacing the CEO.  The answer was essentially no.
• What does the company plan on doing with their excess cash?
• The company likes to keep money in reserve.
• There are 72 (or 30 or 60, this number changed each time it was mentioned) before the EPA liability is completely eliminated.  Saraf discussed how difficult it is to work with the EPA, he said it took 10 years to negotiate the initial payment plan, this was not for lack of trying.  He said he has trouble getting them to return his calls, and hasn't been able to get a final date for satisfaction of the liability.  Somewhere between 30 days, the number a director mentioned, and 72 the number Saraf mentioned.
• Much of the PP&E has been mostly depreciated or fully depreciated, does the equipment have years of service left?
• Yes, much of the fully depreciated equipment is very useful.
• Also worth noting the company is only operating at 50% capacity.
• The company also has a lot of empty warehouse space available.
• Sequestration has provided business opportunities, any conflict including a Middle East conflict would be a boom for business.
• The company would consider future buybacks.
• Why did auditors change?
• The company is required to change auditors every five years due to SEC regulations, that precipitated the switch.  
• The most recent change was due to their former auditor merging with an auditing company that specialized in insurance instead of manufacturing.
• I didn't really buy the explanation of the change, especially considering most of the company's auditor changes were glossed over without any explanation.
• The company stated unequivocally that they will remain with this auditor, my view is this remains to be seen.
• Someone asked if the company could be more transparent, the company gave an evasive answer.
• The company stated that shareholders are allowed to contact directors directly, this is a change from the past where Saraf wanted all communication to go through him.

Informal meeting questions

• What type of marketing does the company employ?
• Word of mouth, no one attends industry events, the industry knows Solitron.
• The company is known as a niche supplier, they do their niche very well.
• The company's niche is a sunset technology, this was a strange answer.  To a later question the company stated their product is unique and unlikely to ever go away.
• Jeff Moore asked what directors look for when they buy a stock for their own account.  One director spoke and said he looks for a stock to go up, and at times looks for short term investments, and other times long term investments.  Some shareholders joked that he should have said "I invested in the Barrons stock of the week."
• The military is willing to spend more on quality parts that meet qualifications.
• The military expects companies to earn a profit, Solitron charges for everything.
• DNA marking is a new requirement, each transistor is required to be stamped with a DNA stamp so a transistor can be uniquely identified, Solitron is stamping their chips and charges extra for it.
• The company might be required to test chips in some special gas chamber, the chamber is expensive, in the $500k range.
• The company's products are used in power supplies, there is no digital replacement, this answer is in contrast to the answer that the company's technology is a sunset technology.
• The company's packaging is unique, not sure what the point of this was.
• Some products are used to steer missiles.
• 90% of the company's products are customer designed, meaning the company employs no R&D.
• Of general note, a shareholder Doug explained afterward to me that the company doesn't sell anything unless the item has been ordered on contract yet.  This means 100% of the company's inventory has been ordered on contract, the company builds nothing on spec.  The company's inventory will all flow through to revenue.
• Gold is a significant factor in cost, copper a larger component.  The management seemed worried about the cost, which is confusing because a few minutes later they stated they pass on all commodity costs.
• The company would consider an acquisition, possibly an upstream acquisition of a larger company to use all the NOLs.
• The company doesn't believe a buyback or dividend would have any effect on the stock price.
• Saraf doesn't appear to care much that the share price doesn't move.
• The company will only consider people for the Board who have industry experience.
• Foreign sales are through US certified partners, I was somewhat unclear on this aspect.  It seemed that foreign sales aren't targeted to foreign buyers, but rather parts are sold to an American defense company, who then sends them to a foreign buyers.
• The company had a large and growing market in some part, but Chinese suppliers flooded the market cheaper.
• The company is facing an issue with wafer sizes, they currently use 3in wafers for production.  The supply of 3in wafers is dwindling worldwide.  Silicon manufacturers have moved to 5in and 8in wafers.  Moving to larger wafers would require a $5-10m investment to completely re-tool the business.
• A note here, this was thrown up as a reason why the company doesn't want to distribute any cash, they "might" need it to re-tool.  I talked to a shareholder after the meeting who pointed out that for how penny tight Saraf is it's unlikely he's going to dump all of their hard earned cash into re-tooling.  This was most likely a red herring.

Conclusion

I enjoyed looking management in the eye and asking them questions.  I think all shareholders were glad the company finally held a meeting.  The problem is that management looked us in the eyes, nodded their heads, but in the end nothing will change.  It's easy for them to entertain us for an hour and a half, but taking action is much different.

My biggest fear after the meeting is that the company could enter into a costly acquisition that's above what they can manage.  My second biggest fear is that management will continue to have an us verses them mentality regarding shareholders, this isn't good for anyone, especially when management only owns around 10% of the shares outstanding.

Talk to Nate

Disclosure: Long Solitron

Questions for the Solitron Board of Directors

I am in Palm Beach mentally preparing myself for the Solitron annual meeting tomorrow.  This means I've been sitting on the beach, enjoying the sun, relaxing and eating fresh seafood.  I wanted to post the questions I intend to ask at the meeting tomorrow, and solicit other questions from shareholders.  I'm not sure how many questions I will get to ask, but I will try to get in as many as I can.

I'm expecting to post again tomorrow with a summary of how the meeting goes, so stay tuned. For anyone new to the Solitron situation I have a short summary below.  For everyone else skip straight to the questions.

Solitron Recap

In 2010 I discovered a tiny profitable net-net, with a slug of cash on their balance sheet.  The company had a number of liabilities stemming from their bankruptcy in the 1990s.  I wrote a number of posts detailing the investment case for the company, and ultimately waited for something to happen.

I eventually wrote a letter to the Board, urging a stock buyback and encouraged them to hold an annual meeting.  After hearing an outcry from investors (including one filing a lawsuit) the company acquiesced .

In the meantime the company paid off all of their known environmental liabilities stemming from their bankruptcy.  The company is now a pile of Treasury bonds with a profitable electronics manufacturing company attached.  It's worth noting they are still undervalued, according to some measures significantly so.

The annual meeting is tomorrow at 9am at the firm's law offices in central Miami.  I was disappointed by the location considering their facility and headquarters are than 10 miles from where I traditionally stay when in Florida.  I would have been nice to see their facility from the inside as well.

I have written too many posts on Solitron to link to each, so here is the Google link for all of them.

Solitron Board Questions

• Are there any residual liabilities from the bankruptcy that are off balance sheet or haven't been noted?
• Why hasn't the company grown in the last decade?  Especially in light of the extraordinary defense spending and growth rich environment.
• What is your approach to target new markets?
• Has your customer list changed much in the last decade?  Have you gained new customers?
• How has the sequester affected your business?
• What accounted for the $190k increase in SG&A this past year?
• How do you measure the business?
• What is your standard of success?
• Do you consider Solitron successful?
• Why haven't you hired a CFO?
• [Statement] As a shareholder I, and others would be happy if the company paid more per year for an audit if the auditor would remain the same year over year. 
• Have you considered taking the company private?
• Is the company more likely to execute a dividend or buyback with the excess cash?
• What is holding the company back from distributing excess cash to shareholders?
• If the company pays a dividend or buys back shares, and shareholders become less vocal will you discontinue annual meetings and stop listening to shareholders again?
• Have you considered an acquisition?
• What would you look for in a potential acquisition?
• Would you consider using debt to finance an acquisition?
• How would you evaluate a potential acquisition target?
• [Statement] As a shareholder, seeing how the business has failed to grow in the past decade I would prefer the company give cash back to shareholders, instead of attempting to grow the business through an acquisition.

If anyone has anything they wish to add to this list leave a comment.  Fair warning, I might be slower to approve comments, I will have my phone at the beach, but won't be checking it as often, please be patient!

Talk to Nate

Disclosure: Long Solitron

Purchasing Bexil at a discount through Winmill

I've never had a reader email me asking what I consider an oddball stock.  Maybe my posts do the talking for themselves.  I find most of the companies I research and write about are not all that odd, they're just not mainstream mid/large cap names that most investors are familiar with.  

Many investors appear to be drawn to complexity.  There is a certain intellectual challenge to a complex situation.  Complexity doesn't interest me that much, I prefer simplicity, but what I really enjoy are things that are hidden.  Complexity is good for experts, hidden things are good for individuals, professionals (most) can't be bothered to look.  I enjoy researching stocks where information is very hard to find.  The research process is like a treasure hunt, each piece of knowledge I pick up is either discarded as useless, or exceedingly valuable.  Anyone can go on these treasure hunts, but most would rather not waste their time.  Some of my favorite stocks are very simple investments, but very hidden.  For many outside investors this process appears complex, it's not complex, just different.

The stocks I want to talk about in this post might appear complex, but keep in mind the above paragraph.  The investment story is very simple, it's unraveling the details that's difficult.  Winmill (WNMLA) and Bexil (BXLA) are hidden, but not complex, what they are is utterly fascinating.  This post might seem complicated, but I would encourage you to read to the end, I think the reward is ample.

I was alerted to Winmill & Co almost exactly one year ago by a reader.  I read their website, and eventually ended up on the Bexil website.  Recently another reader suggested I take a look at them.  I look at a lot of stocks, but if I find myself drawn into a story, and spending an inordinate amount of time reading and researching an idea, I will usually write it up.

Winmill & Company is an investment advisor to a number of mutual funds, both open and closed end.  The company's funds pursue very narrow strategies, such as gold funds.  Of the Midas Funds, one invests in the Harry Browne perpetual portfolio.  A second one, the Midas Magic held 25% of its assets in Berkshire Hathaway, and 20% of its assets in Mastercard.  Incredibly 45% of the funds assets are in two stocks, which by the way are both holdings of mine as well, although I'd never recommend anyone make 45% of their portfolio out of those stocks.

When visiting Winmill's website, one might get the impression the company focuses on asset management.  This might actually be the second impression a visitor might get, the first is the feeling that they were transported back to the information superhighway circa 1996.  The only thing missing from Winmill's site was some blinking text and little animated gifs of spinning dollar bills.  This is a complete total digression, but I'd love it if some finance researcher did a study on the stock performance of companies that have dumpy websites vs companies with slick websites.  My gut says that the dumpy website companies would come out ahead.

The value of Winmill's asset management business is unknown, but what is known is their stakes in two much larger companies, Bexil and Tuxis Corporation.  All three companies are controlled to various degrees by members of the Winmill family.

Tuxis is a self-storage and real estate company located in Connecticut.  They are non-reporting, but as of 2007 they had an equity value of $7m.  As of 2007 Winmill owned 25% of Tuxis, I haven't been able to find further details, but given the Winmill family's tight reign on this operation I would presume the stake hasn't shrunk.

The much more interesting Winmill holding is Bexil Corporation.  Bexil is a holding company that is engaged in securities trading, investment management, and mortgage banking.  Winmill owns 222,644 shares of Bexil.

The company trades securities on their own account, and manages a dividend and income closed end fund.  Close to 50% of the company's revenue is attributed to their trading and investment management activities.  

Bexil's annual report will be a familiar read for investors who have read the Berkshire Hathaway annual report.  Bexil considers themselves successful if they are able to grow book value per share over the long term.  Because so much of the company's results are due to trading gains, and the sale of subsidiary companies, management feels that book value is a justifiable measure.  I agree with a few caveats, the first is that while book value has been growing the share count has been growing almost as fast.  The second caveat is there appears to be some wiggle room as to what the company's exact book value is due to the nature of their operations.  This isn't necessarily a bad thing, but just something to watch out for.

The story with Bexil became much more interesting late in 2012.  The company decided that they wanted to enter the mortgage origination business.  Mortgage origination is a business where a company finds a borrower, lends them the money for their mortgage, then sells the mortgage to the government.  The originator can service the mortgage and make a profit on servicing.  Bexil wanted to enter this market, but didn't have the resources to do it on their own.  They formed a subsidiary Bexil American Mortgage and funded it partially themselves, and partially with outside investor money.  The outside investor is Alex B. Rozek, a name that probably isn't familiar to most.  Alex is Warren Buffett's great nephew, the B in his name stands for Buffett.  Alex manages a hedge fund in Massachusetts called Boulderado Partners LLC.  A side note is that Alex proposed to his then girlfriend at the end of a Berkshire shareholders meeting a few years ago.  Alex not only provided seed capital for the mortgage origination business, but he's also a significant shareholder in Bexil.

Attached to Bexil's 2012 annual report is a two page discussion by Alex explaining why he believes mortgage servicing and mortgage origination are the perfect businesses to be entering right now.  The short summary is there are few companies qualified to do this business, and government barriers to entry are so high it takes years to complete an application to compete.  Bexil American already has all of the required certifications and approvals to operate.

Bexil's balance sheet is hard to parse due to the consolidation with their mortgage origination business, the CEO even states this in his annual letter.  The important parts worth noting are that Bexil has $30.7m in equity, and $15m in cash and securities.  They have a lot of debt, but it's warehouse borrowing related to the mortgages they originate.  A balance sheet is a snapshot in time, and the mortgage subsidiary's books are always fluid with loans moving in and out quickly.  So the snapshot preserved for the annual report most likely bears no resemblance to their current balance sheet.

Bexil American isn't profitable yet, but if an investor believes the story that Alex and management are promoting it should be profitable soon, and when it is the company will be gushing money.  Alex states that a mortgage originator can expect 100% returns on their capital if they do things right.

When examining Bexil through the filter of their latest results, they don't look that cheap at current prices.  The company has a market value of $49m against a book value of $30.7m.  The company has consistently lost money, and until recently was steadily growing book value per share.

The twist in this investment comes with Winmill, they own 222,644 shares of Bexil which at current prices is worth $11.187m.  They also own 25% of Tuxis, which is worth about $400k.  An interesting side note, Tuxis might be worth a look, they are trading at 18% of their 2007 book value.  Both of Winmill's public subsidiaries are worth $11.5m in total.  Winmill's own market cap is $3.045m, meaning they are trading for less than the value of their subsidiary stakes alone.  The market is valuing their investment management business at less than zero.  Winmill also historically had some cash and securities on their balance sheet, let's call it $2m.  Their historic liabilities were close to zero.

When you add all of the holdings up, and toss back in Winmill's presumed cash and securities the investment starts to look like a dollar selling for $.22.  Investors are able to purchase Bexil at a steep discount by purchasing Winmill.  Additionally if the Bexil mortgage origination business does as well as management thinks it will both Bexil and Winmill will benefit.

Talk to Nate

Disclosure: Long Mastercard, Berkshire Hathaway

The importance of expectations

I've had a post on a Greek net-net bouncing in the back of my head for a few weeks now.  As I've thought about writing that post I kept reading articles and blog posts where either readers or authors had unreasonable expectations.  It occurred to me that I've never clearly talked about my expectations for investments, and why they are important to the investing process.

This post probably crosses into the life advice category as well, but I've found that most life advice that's good advice is applicable to investing, good advice is universal.

Nothing can demotivate as quickly as unreasonable expectations.  This is just as true in finance as it is in marriage, or in a career.  Twenty-two year old's who expect to be sitting behind the mahogany desk on the top floor in three years are in for a rude awakening.  Individuals who expect marriage to be all bliss will be disappointed.  Investors who dig deep and do a lot of work on ideas and expect them to all go up will be disappointed.

There are two sets of expectations when it comes to investing, the investor's own expectations, and other investor expectations.  I want to talk about both.

Other investors

This is the easiest set to talk about; the expectations of others.  When the expectations of the market don't align with reality an opportunity exists.  Generally expectations are either overwhelmingly negative, or overwhelmingly positive.

An example of positive expectations can be seen when looking at any media darling growth stock.  The stock is modeled to have 15-20% earnings growth from now until eternity.  Simple models like this fail the Peter Lynch test.  Lynch talks about thinking of real world implications.  He mentions in his book reading a growth forecast and realizing that every person in the US would need to buy the product for the forecast to come true.  An expectation like that is unrealistic, and thus the stock is selling with too rich of a valuation.  Think about how many units would need to be sold to make estimates reasonable as a way to test the market.

Where I spend most of my time is evaluating negative expectations.  Many companies I decide to invest in have been left for dead by other investors.  Investors either expect the company to remain dead money, or to always trade in some tight range that's perennially low.

The key to being a successful value investor is determining the expectations the market or other investors are making regarding a stock, and then comparing those expectations to the facts, or the truth.

Sometimes investors have bad expectations because they don't have all of the information needed to make a correct decision.  Missing information leads to an informational advantage for investors with the information.  The better information also allows better estimates for what an investor might expect to happen in the future for a company.

I think too many investors get hung up on getting an information advantage.  Instead investors should aim for creating a patience advantage.  In many value stocks the selling owners are shareholders who've owned the stock since it was a high flyer.  The stock has fallen, the company has deteriorated, and they are finally throwing in the towel.  These are ideal sellers.  I get nervous when I see that most of a stock's ownership basis is value investors, or the only people talking about a stock are value investors.

Our own expectations

Here is a simple life lesson, people will talk endlessly about things that don't affect them.  People will talk about things that affect them if action isn't required.  If there is an issue that affects someone, and it requires the person to act it will be met with silence.

To become better investors we need to face our own expectations.  I've received emails from readers who tell me they're only interested in stocks that will triple, or go up 5x in three years.  Sure, I'm interested in those stocks as well.  If someone can email me where to find only those stocks I will sell everything I have for them.  I've had readers tell me they only want 20% returns, or they only want high quality net-nets.  A high quality net-net is an oxymoron, they don't exist, if a company is trading below NCAV there is a problem, guaranteed.

Why are our expectations regarding returns so incorrect?  I think some can be traced to Buffett, he famously quipped that he could guarantee 50% returns on $1m invested.  This is like Michael Jordan guaranteeing that he could single handedly beat any high school team in game of pick up ball.  With sports we recognize that superstars are naturally talented, and no matter how many hours we practice, 10,000, 20,000, we will never be able to perform at their level.

Yet Buffett seems so simple, he has this folksy wisdom, and he talks about how he just buys these good businesses and somehow he'd do 50% a year.  The sale pitch is enticing, and we start to believe if he could do 50% why can't we?  Just like we're not Michael Jordan, we're not Buffett either.  Knowing ourselves sets the basis for creating reasonable expectations.

Setting reasonable return expectations should lead to better investing decisions.  If my bogey is 25% a year and I'm only able to do 18% I might start to take on extra risks in an effort to juice returns to meet my goal.  I remember seeing a quote that 40% of investments fail, it's keeping the number of failures to a minimum that drives returns, not a few 30-baggers.  It's fairly easy for a company to go to zero, all they need to do is stop selling and spend down all of their cash, default on their debt and setup an appointment with the bankruptcy court.  It's very difficult for a company to double their sales, or triple earnings.

The second area of personal expectation setting is the time frame required for an acceptable return.  A friend of mine sent me a note months back stating that he set up a test portfolio in Yahoo with a number of stocks he had given up on.  He went back and looked at it and they were all trading higher, many at or above his original estimate of IV.  My friend is extremely patient, but no one is patient forever.  The longer we're willing to wait the better chance we have of an investment idea working out well.

I want to take a journey down a tiny rabbit trail for a second here.  I've had a few comments asking why I prefer to invest in profitable net-nets when research shows that the unprofitable ones end up doing better return-wise over the long term.  The reason I prefer profitable net-nets, or profitable low BV companies is because the profit gives me time for the investment to work out.  I can sleep well at night knowing a company isn't frantically spending down their cash pile.  Impending doom can be a motivator, but impending doom is also a stressor.  I prefer investments that might return less, but the tradeoff is I am willing to hold on to them over a long period and be patient.

I've come to appreciate that investments always take much longer than I expected to work out.  This is why investors seek out catalysts, it's an effort to reduce patience.  I'd rather work on my patience skills, because there are a lot more investments without catalysts out there, than with them.

Another pet peeve expectation is liquidity.  I realize that I probably have some readers who are tossing around serious money in the market, this isn't for you.  This is for everyone else who wishes they had a Ferrari, but really only has a Corolla.  It's possible to build, and liquidate positions in illiquid stocks with smaller amounts of money.  The key is patience and having a reasonable expectation.  In the past selling a stock used to involve going to the bank, taking the certificate out of the safe deposit box, driving to the post office, mailing it, and waiting.  Now we click a button on the computer and complain how illiquid a stock is when we don't have a fill in 15m.

We could all use a deep peer into our souls and examine our expectations.  Are we expecting too much, are we expecting too little?  Are our expectations causing us to make bad decisions?  The secondly look at the expectations others in the market have for companies we own.  Are there opportunities to take advantage?

Talk to Nate

Solitron proxy voting guide

I have written about Solitron Devices extensively on this blog.  I write about the company, not because I have a large position in them, but rather because the story is so interesting.  For readers who don't wish to spend their morning trolling the archives I will give a very quick summary below.

Solitron is a Delaware corporation that makes electronic diodes and components for the aviation and defense industries.  The company went through a bankruptcy in the early 1990s and recently settled their remaining outstanding liabilities related to the bankruptcy.  For years the company traded below NCAV, where most of their NCAV consisted of Treasury bonds, and cash.  The company's operations are small, but efficient, and most importantly profitable.

After owning the stock for a while I became fed up, I was off-put by the brash CEO, and the lack of shareholder focus.  I eventually wrote the company a letter asking for a share buyback and the instatement of an annual meeting.  My letter got the ball rolling, other shareholders began to contact Solitron and push company into action.  One small fund sued the company as a means to force them to establish a date for the annual meeting (June 18th, 9am in Miami FL.)  I have felt that my letter, and subsequent posting of it on this blog got the snowball rolling.  I can't take credit for anything subsequent my letter, but I do feel that I got the process moving.

I have a lot more thoughts on this topic in general, and with regards to the shareholder/management relationship problem, but I want to keep this post focused.  I will save those thoughts for some point in the future.

I received my annual report and proxy in the mail recently:

Both are available online through EDGAR as well.

I thought it might be helpful to walk through a few issues in the proxy that are up for a vote, and voice my opinions on them.  It would be much easier to say "Vote Yes on a,b,c.. No on d,e,f.." but instead of spoon feeding my views I'd rather share my opinion on these issues.

Director Election - Up until recently the Board of Solitron could be summed up as follows: a CEO and two empty leisure suits.  Of the three members of the Board, two seemed to be missing in action, they will not be getting my vote.  One of my goals in establishing an annual meeting was so the company would allow shareholders to vote on the Board.  We need fresh faces on the Board, removing Jacob A. Davis, and Joseph Schlig is essential.

The company recently nominated two other new directors for a short term, they are also up for re-election at the annual meeting.  I voted against the two new candidates as well.  I don't wholly trust the current Board's judgement, and since the new nominees were nominated by the current Board by proxy I don't like them either.

Another reason to vote against Joseph Gerrity and Sidney Kopperl is that the company changed their bylaws so that director elections are staggered.  It would take three years for the full Board to be replaced.  The last thing I want are two more potential bad Board members voted in for three years.

I voted for Saraf to remain on the Board, I voted against the other four nominees.

Ratification of Accountants - This is often the easiest item to vote on a proxy.  Most companies keep the same accounting firm year to year and the vote is more of a formality.

Solitron is different, they have a habit of firing their accounting firm yearly and bringing in someone new as a way to save costs.  This is a practice I'd like to see discontinued, and an item that's hopefully raised at the annual meeting.  If no one else raises it, I plan to.  I voted for the ratification, but intend to question the Board as to why they think this is a good practice to save a few thousand dollars, but alienate themselves from the investor community.

Say on Pay vote - Shareholders are allowed a non-binding vote on executive compensation.  The company doesn't have to listen to shareholders, but this is a way for the company's owners to loudly voice their view on what management takes out of the company each year.  Smart companies listen to their shareholders, and if shareholders vote against pay they revise it.

I voted against this item.  The only executive is Shevach Saraf, the CEO, who made $403k last year.  This was up from $380k the year before.  I recognize that in the grand scheme of things $403k isn't an egregious salary for the CEO of a company that does $8m in sales.  On the other hand Soliton has been treading water for almost two decades in terms of profitability.  I don't see why shareholders should regard a CEO who is essentially babysitting a company with a paycheck for $403k.  If the company were growing, or shareholder friendly I would reconsider in the future.

Frequency of pay advisory vote - With the passage of Say on Pay shareholders have the choice on how often they want to voice their view of management compensation.  The choices are 1 year, 2 years, or 3 years.  Naturally management doesn't want the owners meddling in their affairs, Solitron has suggested that every three years is an appropriate time for shareholders to vote.

I disagree with this and firmly believe shareholders should be voting on compensation yearly.

Conclusion

I am interesting in any differing thoughts or views on the proxy that shareholders, or any readers have.

I will be attending the annual meeting in person, the meeting is on June 18th at 9am at the offices of Akerman Senterfitt in Miami Florida.  I have informally talked to a few other shareholders and we are planning on grabbing something to eat after the meeting.  If anyone is planning on being there you're invited to join us and talk about Solitron, micro-cap stocks, value investor, or really anything afterwards.  If anyone has any suggestions on where to eat within walking distance of the SunTrust building in Miami they would be helpful too.

Talk to Nate

Disclosure: Long Solitron

Advice for newly minted college graduates

This time of the year is college graduation season, and attending a graduation party this weekend put me into a reflective mode.  I've been thinking about my own trajectory after college, and what things I might do different if I could go back 10 years and re-live my 20s.

In most posts I put a little disclosure at the bottom stating if I'm long a stock or not.  For college advice my disclosure has been moved up top.  I'm not the person to take college advice from, or probably even career advice.  My university was probably glad to have me gone because I was dragging down the student body GPA average.  If school GPA meant anything in life I've be sweeping floors or flipping burgers right now, fortunately it doesn't.

1. Be open minded - Life never goes the way anyone plans, so be open minded and look for new opportunities.

When I graduated 10 years ago I didn't know what a stock or a bond was, and I didn't really care to know.  If someone would have told my then-self what I would be interested in today I would have wondered what happened to interest me in such boring things.  I remember some friends taking finance classes in college, at the time their studies looked like some sort of prison torture.  Now ten years later I enjoy researching and writing about investments.

Interests change, be willing to change with them.  No one's life is pre-destined to go a certain route, no matter what your parents might say.  Be adaptable and be willing to try new things.

2. Get out of debt and stay out - You graduates are deep in the hock, I feel bad, and I'd recommend paying your debt off as quick as possible.  Sure, maybe those loan payments are small and affordable.  Sure, maybe that payment for a brand new car is small and affordable.  Sure, maybe the mortgage is small and affordable.  Small payments start to add up quickly into a large fixed obligation that needs to be paid monthly or else some banker will come and take all of your things.

Being debt free means being flexible.  It gives you the ability to take a lower paying job if you need to, or save more for a rainy day.  Our culture is one of debt and living for today, saving and paying cash are things our grandparents did, it's not a bad habit to get into.  It always seems like the spendthrifts get the last laugh, but to live a debt-fueled life means living with considerable stress.  Remember, if you pay off all your debt and decide it was a mistake you can always borrow again.

Here's something else not many people will tell you.  You just escaped four years of living in a barn, er dorm and with your new found riches want to experience a little luxury.  Don't waste your time keeping up with the Joneses.  All those luxury items you have been craving aren't all that great, the feeling of euphoria wears off quickly.

3. Enjoy your youth - You are only young once, so enjoy it.  This doesn't mean partying late into the night as most people think, but doing things that are best enjoyed while young.  If you have any inclination for endurance sports now is the time to get involved.  As you age your body doesn't recover quite as quickly, and things that used to be easy become harder.

Last year a friend and I decided to ride our bikes to DC in a weekend.  We covered 200 miles in two days, it was a lot of fun, but my body paid the price.  I injured my knee and it's taken almost a year to recover.  I'm back to running and biking again, but I've also realized I'm not 16 or 22 anymore, I now ease into things and build up mileage slowly.

Travel is easier when you're younger and don't have kids.  Almost anything is easier before you have kids, do those things now.

4. Don't marry your job - No matter how hard you work your company will never love you.  All those all-nighters and 80 hour weeks will mean nothing when layoffs come.

Work hard at your job and use it as an opportunity to learn.  When you've learned as much as you can, or feel it's time to move on do so without hesitation.  If the company felt it was time to move on they would eliminate you without hesitation.

5. It's not what you know, but who you know - I went to an entrepreneurship conference back in college and I remember a millionaire entrepreneur walk through this little exercise.  He asked all of the A and B students to stand-up (I continued to sit) and look around at everyone sitting.  He then said "Everyone standing, those sitting will be your future bosses."  His reasoning was that people with lower grades were most likely partying or hanging out building personal connections instead of studying.  In the real world it's the people with the biggest network who get ahead, not the person with the biggest brain.

We're taught all through school that the brightest do the best, and that intelligence is rewarded.  If that were so why aren't scientists rich, or the people from NASA living in the Hamptons?  The truth is if someone has average intelligence but great people skills and some hustle they will do very well for themselves.  Even below average intelligence and above average hustle is a successful combination.

A former boss had some relatives who weren't the brightest, one even had trouble reading.  What these guys lacked in the brain department they had in the hustle and street-smart department.  They turned their summer lawn mowing business into a multi-million dollar landscaping empire.  These guys together are worth close to $10m, yet one of them has to have his wife read him the menu at a restaurant.

For anyone out there who didn't graduate in the top of their class there is hope.  Not having an Ivy League education isn't going to be the hinderance that Ivy League schools try to tell you it will be.

6. Remember your family - This is lower on the list, but the list isn't in any particular order.  Right now you probably only have parents and siblings, no wife or kids.  As you get older family should become a top priority.

Friends will come and go, but your family will always be around.  Make sure to invest in these relationships.  You'll probably come to realize over the next few years that your parents really weren't out of touch, and they are a lot smarter than you ever realized.  This will be hammered home once you have kids.

For most the legacy they leave is their children.  A few very wealthy people build libraries and fancy buildings, the rest of us don't have that.  I'd prefer to touch people's lives rather than have my name plastered on some granite building.  Someone who was influenced remembers you, most people don't actually know what Carnegie or Rockefeller did.  My legacy is the two little boys who greet me each night when I come home.  It's hard to build character in children if you're never around, always traveling or working late.

7. Find your purpose - A person without a purpose in life is like a ship adrift being knocked in any direction with the waves.  Find a purpose and anchor yourself to it.  This is a tough question that most people don't want to face, but it's imperative.  Our purpose is what drives us through life, it gives meaning to what we do, even the mundane.

8. You will make mistakes - No one is perfect, you will mess up, and you will probably mess up big time.  If you strive for perfection you will live a life of disappointment.  Everyone makes mistakes, own up to them quickly and be honest, then work to correct them.

Hopefully something in here will encourage someone!  The truth is some of the ideas in this post will be far more profitable than any company I ever profile on this blog.  These lessons pay dividends for life.

Talk to Nate

A retail turnaround with asset backing, and a catalyst

A struggling retailer with a large amount of fixed real estate assets; a few companies come to mind like JC Penny and Sears Holdings.  While both of those companies fit the stereotype, the company I want to look at in this post is Kirkcaldie & Stains, a New Zealand retailer.

Kirkcaldie & Stains (KRK.New Zealand) is a retailer (department store) that has been in business for 150 years in Wellington, New Zealand.  The company originally owned the building they were located in, but over time sold it off.  The company doesn't actually own the building that holds their flagship retail store, and in 2001 to rectify the situation purchased the building adjacent to themselves.  The company breaks results into two segments, retail and property.  Both have struggled for the past few years, but there are signs things are turning around.

I'm not usually a fan of turnarounds, there are too many variables that need to come together for an investment to work out.  For a retail turnaround to work the retailer either needs to reduce expenses if they're bloated, or more likely bring in new brands and increase store traffic.  For Kirks, who is experiencing declining sales volume, cutting expenses alone won't bring the company to profitability.

In terms of a retail turnaround the company has a lot of low hanging fruit changes that they are implementing in an effort to gain customers.  Up until this past year the company didn't have an online store, they just recently started selling online.  They have also started to carry well known international fashion brands.  In an effort to reduce costs the company moved their back office operations to a lower rent area nearby.  With all of these changes it's hard to know if any one of them will help change the company's sale momentum.  If they do it would be a boon to investors, but if they don't the investment story isn't destroyed.  The story of Kirks is more of an asset story than a retail turnaround story.

As I mentioned above the company owns Harbor Centre which is located in the prime business district of Wellington.  The company purchased the building in 2001 and holds the building on their balance sheet at historical cost.  Typically when a company has an asset worth far more than its balance sheet value the asset is considered hidden.  Harbor Centre's value isn't hidden in the slightest.  The company has the building valued yearly and includes the latest appraisal value in the annual report.  As of the annual report the building had a carrying value of $26.8m but was appraised at $46.5m.

I put together a small summary adjusted balance sheet to show the difference between reported book value, and appraised book value.

The adjusted balance sheet clearly shows that the company is trading at book value for the property company alone.  In investor parlance you buy a building and get a retailer thrown in for "free".  It's worth noting this isn't an empty building, they do have tenants paying rent, vacancy is 9.6%.

At this point in the post the Kirks story is no different than what someone might write about Sears or JC Penny or any other asset heavy struggling retailer.  The difference is that Kirks has been working to monetize their Harbor Centre property.  

The company put Harbor Centre on the market and received a bid last fall.  The bidder wasn't announced but took their time to complete due diligence.  When the sale of the building was announced shares ran up to $3.20, which is about 50% higher than where they trade now.  Once investors realized the company might do something with their undervalued asset they suddenly started to price it closer to reality.  Unfortunately the bidder on the building fell through, and along with it the share price collapsed.

The company engaged a consultant to advise them on how they could split apart the companies.  Kirks will spin-off the Harbor Centre property and the associated management company into a separately listed company this year.

A lot of readers might be wondering if the company is going to split off their property group, then why is the company so cheap?  The answer is located in the results section of the annual report, the company's returns have been poor to say the least.  On a headline level it's understandable to see why investors are scared and fleeing the stock.

At the retail level the company's sales have been in decline for the last five years, and investors have apparently lost hope.  The company's property division has provided support for earnings up until the New Zealand earthquake.  Since the earthquake the property division has had to invest significant amounts into earthquake strengthening.  They have also invested in an expensive remodeling effort to attract a new client.  While many one time costs will roll off for the property division soon they have also been hit with much higher insurance rates, most likely in connection with the earthquake.

Even with the poor earnings there significant value resides in the Kirks property division.  If the company were to split today I would consider the stock's current price close to fair value for the property division alone.  That means that either the retailer is worth nothing, which is a possibility, or it's a gross mis-pricing.  Usually what sinks retail turnarounds is the company isn't able to right the ship quickly and takes on debt to finance operations.  The company's debt starts small but grows with deteriorating conditions eventually pushing the struggling retailer into bankruptcy.  Kirks has debt on their balance sheet, but it's all associated with the property division.  The Kirks retail division has no associated debt, which gives the company additional runway to recover.

Talk to Nate

Disclosure: No position, although I do intend to buy shares.