Portfolio Change Update

December 4, 2018

Purchased Electro Scientific Industries (ESIO):

•  Supplier of laser-based micro-machining primarily for printed circuit boards & semiconductors
• Known of company for a couple decades
• Previously wasn’t comfortable with direction of company
• New management demonstrating brilliant strategy & turnaround
• Trading at less than 7x this year’s earnings at time of purchase
• Approximately two weeks after purchase company announced acquisition by MKS Instruments for $30 cash – nearly double our purchase price
• See note below regarding trim after announcement

Purchased Motorcar Parts of America (MPAA): 

• Provide remanufactured automotive aftermarket electrical components
• Strong relationships with parts retailers should lead to increased market share
• Anticipate company will enter new categories and geographies
• Aging automotive fleet is likely tailwind
• Material increase in earnings anticipated from new contract wins
• Trading approximately 10x current year’s earnings estimates when purchased

Purchased Fluent, Inc. (FLNT): 

• Performance marketing services company
• Growing, differentiated database of 200 million consumers
• Spun-off related entity earlier this year
• Management now laser focused on increasing revenue growth
• Anticipate revenue growth will lead to margin expansion
• Trading near book value when purchased
• Trading at less than 13x next year’s consensus estimates at time of purchase
• Believe consensus earnings estimates are low

Added to Barrett Business Services (BBSI): 

• Outsourced human resources provider for small and medium sized businesses
• Trimmed when stock price moved up earlier this year
• Management executing business plan
• Stock price fell with confusion around Q2 results
• Consequently, forecasted upside increased
• Anticipating clarity and solid results, added to holdings before reported Q3
• Were rewarded for anticipating correctly

Sold Myriad Genetics (MYGN): 

• Leading provider of genetic testing
• Catalysts developed nicely
• Made strategically smart acquisitions
• Investors recognizing Myriad’s competitive strengths and opportunity
• Held shares longer than typical value manager due to the strong fundamentals
• Allowed Myriad to reach higher valuation
• Hence, upside at bottom end of portfolio
• Sold to purchase Electro Scientific and Fluent (details above)

Sold Super Micro Computer (SMCI): 

• Leading developer computer server technology and applications
• Investigative Bloomberg Business Week article purported company’s motherboards had malicious Chinese spy chip implanted
• Whether true or not, concerned SMCI customers may pause before buying potentially infected boards, causing revenue headwinds
• With increased business risk, shares were sold out of the portfolio

Trimmed Electro Scientific Industries (ESIO): 

• Supplier of laser-based micro-machining primarily for printed circuit boards & semiconductors
• Approximately two weeks after purchase company announced acquisition by MKS Instruments for $30 cash, nearly double our purchase price
• Sold half position

Portfolio Change Update

September 14, 2018

Added to Atlas Financial (AFH): 

• Niche commercial vehicle insurer
• Strong belief in innovative management team
• Trading less than 5x management’s guidance for 2018 earnings (rarity for non-cyclical) at time of purchase
• Stock price drifted downward after previously raising weighting to 5%
• Took opportunity to purchase more shares and increase weighting back to 5% – largest weighting will buy

Added to ChromaDex (CDXC): 

• Dietary supplement and ingredient supplier
• Additional research supporting NIAGEN, their primary ingredient
• Increasing number of active studies (over 150) by universities & institutes
• Building distribution relationships around the globe
• Anticipate new ingredient supplier relationships – possibly quite meaningful
• Share price drifted after large spike last year
• Yet, fundamentals incrementally improving
• Therefore, added to weighting

Added to Customers Bancorp (CUBI): 

• Commercial bank primarily serving the Washington, D.C. to Boston corridor
• Spinning off disbursements and mobile bank business, called BankMobile
• Process taking longer than anticipated
• Investors appear to the focusing on the near-term glitches, rather than value of primary banking franchise
• Trading less than book value
• Excluding BankMobile, Customers is trading at less than 10x this year’s earnings
• Increased weighting anticipating eventual successful BankMobile monetization or shuttering business, at which point the core banking franchise value should drive share price 

Trimmed Enova International (ENVA): 

• Online subprime lender with operations in U.S., U.K. and Brazil
• Management masterfully executing business plan
• Surprised investors with strong income leverage in first quarter and big earnings beat
• Stock price responded quite favorably, then continued to move up into Q2 release
• Forecasted upside reduced as a result
• Trimmed to raise cash for alternatives with greater forecasted upside

Trimmed Myriad Genetics (MYGN): 

• Leading provider of genetic testing
• Catalysts developing nicely
• Made strategically smart acquisitions
• Investors appear to be recognizing Myriad’s competitive strengths and opportunity
• Have held shares longer than typical value manager might due to the strong fundamentals
• Therefore, shares trading at higher valuation than normal for portfolio
• Believe more money can be made in another company
• Consequently, trimmed position

 

Portfolio Change Update

June 14, 2018

Purchased Health Insurance Innovations (HIIQ): 

• Develops, distributes and administers individual health insurance and supplemental plans
• Takes no underwriting risk
• Debt free
• High return on capital
• Free cash flow generator
• Growing customer/policy count rapidly
• Rolling out new technology platform – could further accelerate revenue growth & create new business opportunities
• Margins should expand meaningfully with growing revenues
• Approximately 12x consensus earnings at time of purchase

Purchased Insight Enterprises (NSIT): 

• Provide technology solutions to Fortune 500 companies and governments
• Solid return on capital
• Successfully integrating large 2017 acquisition
• Demonstrating financial accretion from acquisition
• Should lead to free cash flow generation
• Free cash flow will likely lead to additional strategic acquisitions
• Benefitting from software & solutions moving to recurring revenue model
• Trading less than 10x consensus earnings when purchased
• Significantly, earnings guidance has since increased

Added to Atlas Financial (AFH): 

• Niche commercial vehicle insurer
• Strong belief in management team
• Business & industry confidence increased after recent meetings with management and attending May analyst meeting
• Trading less than 6x management’s guidance for 2018 earnings (rarity for non-cyclical)
• Raised weighting to 5% – largest weighting will buy 

Added to Green Bancorp (GNBC): 

• Texas business bank
• Successfully cleaned up problem loans tied to oil price drop
• Originally purchased modest weighting, then stock price ran
• CEO acknowledges bank will ultimately be sold (CEO has done before)
• Earnings caught up with stock price
• Added to position for loan growth phase and potential acquisition

Added to ZAGG, Inc. (ZAGG): 

• Leading designer and marketer of mobile device accessories
• Last year trimmed position after it ran on high expectations
• Price dropped after fourth quarter report
• Used erratic investor reaction at lower price to finish rebuilding trimmed shares – around 10x consensus estimates
• After addition, first quarter earnings beat investor expectations by wide margin

Sold Innospec (IOSP): 

• Specialty chemical company
• Management doing splendid job with synergies tied to large acquisition last year
• Profits advancing nicely
• Share price responded
• Therefore, forecasted upside diminished
• Concerned highly profitable business line disappearing in medium-term
• Sold to deploy funds to better alternatives

Trimmed Barrett Business Services (BBSI): 

• Outsourced human resource services company for small and medium sized businesses
• Management executing business plan
• Stock price moved up
• Consequently, forecasted upside decreased
• Trimmed to raise cash for alternatives with greater forecasted upside

Trimmed Enova International (ENVA): 

• Online subprime lender with operations in U.S., U.K. and Brazil
• Management masterfully executing business plan
• Surprised investors with strong income leverage in first quarter and big earnings beat
• Stock price responded quite favorably
• Forecasted upside reduced as a result
• Trimmed to raise cash for alternatives with greater forecasted upside

Portfolio Change Update

January 22, 2018

Purchased Apogee Enterprises (APOG): 

• Commercial glass and frame manufacturer
• Betting management will be able to turn strategic acquisitions to financial accretion
• Expect service backlog will lead to installation business rebounding
• Margins forecasted to expand over time
• Expansion into mid-height buildings should significantly increase available market
• Geographic expansion could provide a multi-year runway for growth
• Trading at less than 13x coming year’s growth

Purchased Steelcase (SCS): 

• Leading office furniture designer and manufacturer
• Look for European margins to expand with new, more efficient manufacturing
• New products addressing changing styles should benefit revenues
• Anticipate growth in Asia/Pacific
• New European design center should raise prominence and revenues in Europe
• Capital expense incentives in new tax bill could be meaningfully positive
• Believe industry and company at beginning of cycle

Added to Key Tronic (KTCC): 

• Differentiated contract manufacturer
• Unique competitive advantages leading to market share gains
• Company struggled to regain meaningful revenue growth in recent times with loss of large customer
• Stock price dropped since October when company signaled they were close to winning a large new customer
• Trading at approximately 60% of book value
• Believe new business will soon create revenue and earnings momentum 

Sold Lattice Semiconductor (LSCC): 

• Design programmable logic semiconductors
• Agreed to be acquired by Canyon Bridge
• Significantly trimmed position after announcement and subsequent price rise due to concerns U.S. Government would block sale
• Sale was blocked
• Company held analyst meeting that enthused investors
• Company hasn’t delivered on promises for too long
• Used enthusiasm around analyst meeting to sell remainder of position

Trimmed Vonage Holdings (VG): 

• Provider of voice over IP services, also known as VOIP, to business and residential clients
• Management masterfully executing business plan to improve business mix and growth rate
• Stock price rallied strongly following benefits from strategic, revolutionary acquisition
• Valuation reflecting lots of good news and future growth
• Consequently, trimmed to one of smallest positions in the portfolio

Trimmed ZAGG (ZAGG): 

• Develop and market accessories for mobile devices
• A year and a half ago, investors lost confidence management could turn mophie acquisition to profitability – we disagreed
• Hence weighting raised to 5% at that time – highest will buy
• Management was successful and share price rallied sharply
• Trimmed a few months ago when weighting grew to 10% of portfolio – largest we will own
• Trimmed again after price rose further and weighting once again grew close to 10%

 

Portfolio Change Update

November 15, 2017

Purchased First Internet Bancorp (INBK): 

• Online commercial bank
• Above average loan growth in low loss categories
• Expect management to develop consistent loan sale process generating fee income
• Expecting earnings to grow faster than fixed expenses, enhancing income growth
• Trading at less than 12x next year’s consensus estimates at time of purchase

Added to Carbo Ceramics (CRR): 

• Manufactures proppants and other technologies for oil & gas well completions
• Reduced excess industry proppant inventory
• Proprietary new technologies adoption increasing
• Stock price under $10 down from nearly $200 at peak and trading at less than half tangible book value
• Continuation of methodical process of increasing the energy weighting in the portfolio

Added to Navigant Consulting (NCI): 

• Professional services and consulting firm focused on companies in Finance, Healthcare and Energy
• Number of individually inconsequential events collectively impacted earnings in the first half
• Share price dropped meaningfully from level where position trimmed earlier in year
• Meeting with management team led to conclusion issues would be quickly overcome
• Increased weighting from smaller than average to normal size

Added to Psychemedics (PMD): 

• Hair based drug testing firm with global presence
• Earnings grew and share price responded to initial opening of Brazil market
• Additional testing requirements may more than double Brazil market over next 12 months
• Plus, initiatives developing in Brazil may lead to market share gains
• Expecting earnings could grow meaningfully from these developments
• CEO recently purchased shares 

Added to Super Micro Computer (SMCI): 

• Design & sell high-end servers and related applications
• Share price declined in part based on margin squeeze from component price spikes
• Entering important large business data-center market
• Experiencing high growth in China
• Now entering next upcycle led by Intel’s introduction of the next generation server processor
• Increased weighting to take advantage of lower price with improving business drivers

Added to VAALCO Energy (EGY): 

• Produce oil in West Africa
• Share price had limited response to higher oil prices
• Direct beneficiary of higher oil prices
• Believe oil prices will continue migrating higher
• Increased ownership, raising energy sector weighting further
• Trading at less than 10x this year’s consensus earnings estimate

Trimmed Myriad Genetics (MYGN): 

• Leading provider of genetic testing
• Stock price roughly doubled from early this year when added to the position
• Pleased with how catalysts developing
• However, valuation increased and our forecasted upside decreased
• Therefore, position trimmed to raise cash for First Internet Bancorp purchase

Trimmed (ZAGG): 

• Develop and market accessories for mobile devices
• Over a year ago, investors lost confidence management could turn mophie acquisition to profitability – we disagreed
• Hence weighting raised to 5% at that time, highest will buy
• Management was successful and share price rallied sharply
• Trimmed when weighting grew to 10% of portfolio, largest we will own