Market Update - Coronavirus and Financial Issues

March, 13, 2020

The Bail-in

With the disruptions in our daily lives caused by the coronavirus and the sharp selloff in the stock markets on a global basis, we thought it would be helpful to share our insights on the effects on our public and private investments.

In the public markets, we have been focused on essential services and essential technologies investments since 2013. We focus on those companies which have innovative technologies that have distinct cost and competitive advantages, for which there are few competitors, in sectors that are growing strongly that are or will be producing rising levels of free cash flow. Since these are essential to serving basic human needs, demand has not been adversely affected by the coronavirus which is affecting many other industries. Our companies are not being adversely affected by the Saudi decision to drive the price of oil down nor the Federal Reserve’s decision to lower interest rates. Since liquidity is an important aspect of our investment approach, some of our stocks are being affected by margin calls, which has caused other investors to sell what they can, not necessarily what they want. These declines are temporary.

What differentiates our approach from others is our focus on those companies that generate rising levels of free cash flow. The table below illustrates the difference in the level of free cash flow generation and its growth from the broad stock market. Recent earnings gains on the S&P 500 are the result of stock buybacks, mergers and acquisitions and tax reductions.

 Yield to Enterprise Value 2017 - 2019 Growth
New Era Technologies Income 4.0% 32.8%
Producing Gold Stocks 7.9% 57.3%
S&P 500 Index 3.7% -12.3%

 

We recognize that there will be periodic rises and falls in the markets, but believe that by sticking with our investment disciplines, the companies in our portfolios will ride out these waves and will continue to outperform the market over the long term.

Neither of our private investments has been affected by the turmoil of the coronavirus or financial markets. Sales of Aequion products continue to rise with QI 2020 sales in multiple sectors exceeding sales for all of 2019. Most of the sales are still in the agriculture sector with a growing interest from hydroponic farmers. Braidy Industries is back to its original track to finance and build a new aluminum mill with a 30% to 50% cost advantage, which will generate the cash to finance the development of Veloxint’s super strength metals with their ultimate ability to cut the weight of the landing gear on commercial aircraft by 60% to save $25,000 in operating cost annually for each pound of weight reduction. Because of its strong cost and competitive advantage, financing is expected to be completed in the next few months.

We wish you all a healthy and joyous year ahead. Please do not hesitate to reach out with any questions or concerns you may have.

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