Jerash Holdings: How we handle melting ice cubes

This article is a tale of how we track the intrinsic value of each stock we own, and how we operate when that intrinsic value appears to be receding.

As we write this, the markets are in turmoil. It’s fascinating to witness just how short-sighted the average human is.

At the turn of the year (2025), the S&P 500 looked invincible.

Not anymore.

You’d think it was Armageddon or aliens have finally invaded.

But, no.

It’s just our old friend, uncertainty.

How will Trump's tariffs impact the economy?

How long will the maximum tariffs last?

How will the world respond? And will there be a blood-bath-inducing trade war?

Is it all a ruse, just to get the Fed to cut rates and have trading partners fall into line?

Is the new government incompetent and insane with no clue what they’re doing?

No one knows.

We wrote recently about how the markets hate uncertainty. You can read the case study here.

The fact is, we’re in uncharted territory.

Something we find interesting is the debate between those telling everyone to ‘buy the dip’ and those warning of the first secular bear market since the 70s.

If a full-blown trade war does erupt, and a secular bear market is here to stay, blindly buying the ‘dip’ will be money down the drain for a couple of decades.

This should be a genuine concern for anyone investing into the stock market.

Fortunately, deep-value investing provides a rock solid framework that works in all market conditions.

There is no ‘dip’, just the intrinsic value of each business as the dependable benchmark.

The basic principle is to buy healthy businesses for far less than they’re worth to a private owner.

Companies in the S&P 500 almost never get down to these kinds of valuations, which makes it confusing and difficult for people to know when to buy during a crash.

Aside from all other benefits, the deep-value framework provides a foundation of conviction which helps us avoid bad decisions.

Each week we run our scanners which typically return a handful of quantitatively-cheap stocks for us to research.

This week it sent us over 100.

We compare the stocks on our watchlist with those in our portfolio.

When we find something much more compelling, we sell the existing stock and switch the remaining cash into the new one.

We’ll do this even if it yields a loss from the existing stock, because the overall gain is generally much higher.

More compelling = a much higher quality business priced at the same valuation as the existing (lower quality) stock.

This week's case-study illustrates this process perfectly.

Jerash Holdings (JRSH)
Jerash Holdings is a manufacturer and exporter of custom, ready-made sportswear and outerwear for global brands.

Their largest client, VF corporation, owns brands such as The North Face, Timberland and Vans.

Their main production facilities are based in Amman and Al Tajamouat Industrial City, in Jordan.

In 2022, the company faced significant uncertainty.

Supply chains were still recovering from COVID disruption, the macro-economic environment was in flux and consumer demand appeared weak.

The market also had company-specific worries.

Its largest client (VF corporation) was experiencing issues of its own and revenues from this single client represented around 60% of its total.

If VF fell, Jerash would be extremely vulnerable.

It didn’t take long for the market to start pricing Jerash below its liquidation value.

The valuation metrics were as follows:

NCAV ratio: 0.9
TBV ratio: 0.4
EV/FCF ratio: 3
P/FCF ratio: 7

The earnings valuation wasn’t excessively cheap, but the price was significantly below liquidation value for us to hold it in our portfolio.

At the time we purchased it, there wasn’t much else around, thanks to the bull market being in full swing.

Although it was a mediocre business, we were very confident that it would still be operating 5 years from now.

Its cash far exceeded its debt and it had consistently generated positive FCF over the last 10 years.

And, in reality, they could find more customers if VF did die (which we figured was highly unlikely).

We were making a very familiar bet:

The business wouldn’t die and would indeed continue providing cashflow to its owners for the foreseeable future.

Our average purchase price was around $3.05.

The price then fell further to an eventual low of around $2.80.

A melting ice cube
We track the valuation metrics for every stock we hold.

We want to know if the business is increasing in value or decreasing, as each quarter passes.

Jerash Holdings had a steady asset-value, but its earnings were becoming a liability.

As the TTM FCF unfolded, the average 5Y FCF figure dropped from almost $4m per year to just over $1m.

A single bad year is no big deal. It’s often the reason why stocks become cheap in the first place.

However, when the 5Y average starts to look unattractive, relative to the current price, the risks associated with future earnings start to increase.

In value investing, people refer to this type of scenario as a ‘melting ice cube’.

A business that looks cheap today, but that will soon decline in intrinsic value far below the price we originally paid.

We didn’t immediately exit, because the company was due to release another financial update and we didn’t have anything better.

Besides, the business was still comfortably trading far enough below liquidation value for us to be confident that we wouldn’t lose very much if the business did die.

We knew, at some point, the cash burn may start to eradicate asset values, and our margin of safety with it.

But, we could track this through each quarterly release.

We started searching for more compelling stocks, while awaiting the next update.

In February 2025, that update arrived and it was good news.

Jerash Holdings appeared to have a future as a going concern after all.

The market expected losses and it got breakeven, as revenues increased 28% YoY.

The supply chain issues in Israel had cleared up which reduced delays and storage costs, and they announced plans to increase production capacity by 15%.

This was two quarters in a row where the business had beat analyst expectations.

The company was still mediocre and probably not going anywhere fast, but it also probably wasn’t going to die either.

And, this is all we needed, as deep-value investors.

The price rallied until our position was 5% in profit. By this point, we’d already found an even better stock to replace it.

We exited Jerash for a 5% gain and reinvested the capital into the new stock.

Summary
Despite its reputation, deep-value isn’t a passive investing approach.

It requires constant work to find things and then make sure nothing has changed with the original idea.

By buying businesses that look cheap to both earnings and assets, we have a margin of safety that protects against significant losses.

This type of margin of safety doesn’t disappear overnight.

It takes months or even years for the ice cube to melt, which is plenty of time to find a better idea and exit without significant losses.

The key is to never overpay in the first place.

In the current environment of chaos and uncertainty, deep-value offers a solid framework that we can depend on, no matter what’s happening in the world.