Purchased Texas Capital Bancshares (TCBI):

• Highly respected Dallas, Texas based business bank
• Limited branch network relative to asset size
• Texas economy, and Dallas metro specifically, remains one of most vibrant in nation
• Company refocusing after couple years of losing their way
• Problem loans falling, even in shadow of COVID Recession, as bank refocuses
• Believe may have excess reserves for estimated COVID Recession losses
• Stock price down nearly 60% from 2018 peak when purchased
• Trading around 70% of book value and approximately 6x normalized earnings when purchased

Added to Geospace Technologies (GEOS):

• Debt-free pioneering developer of seismic equipment for oil & gas industry and burgeoning border security market
• Stock price under pressure during COVID’s weight on market
• Stock price down with prospect for additional oil and gas reservoir monitoring orders improving while border security contract renewal likely drawing closer
• Trading approximately half of book value at time of purchase

Trimmed Green Brick Partners (GRBK):

• Quality return on capital focused homebuilder with low leverage
• Operate in high population growth and housing growth markets – primarily Dallas & Atlanta
• Direct beneficiary of housing shortage caused by lower interest rates and preference to own a home during pandemic
• Management team effectively executing
• Stock price up nearly 100% this year
• Second time this year took money off table to redeploy to companies with higher forecasted upside

 

Purchased Bonanza Creek Energy (BCEI): 

• Colorado oil & gas producer
• CEO joined the company nearly two years ago
• Operating discipline and production growth have been remarkable under new leadership
• Anticipate production continuing to grow at least 15% due to strong property position
• Joint venture with Anadarko could accelerate production growth in two years
• If oil prices rise, will directly benefit cash flow
• Purchased initial position in early January
• Stock price declined with falling oil prices in response to coronavirus news
• Used opportunity to complete purchase of full portfolio weighting
• Trading at less than 50% of book value and under 4x estimated earnings

Purchased Green Brick Partners (GRBK): 

• Home builder in fast growing metropolitan areas
• Expect increased number of selling communities leading to accelerated growth
• Lower interest rates should benefit sales activity
• Expanding into entry level homes, initially in Dallas, then Houston
• Will likely enter additional high population growth markets
• Trading under 10x this year’s consensus earnings at time of purchase

Added to Apogee Enterprises (APOG): 

• Leading commercial glass and frame manufacturer
• Position was trimmed in third quarter after good earnings led investors to push stock price up
• Stock price dropped in December following a temporary pause in the framing segment
• Met with management day earnings reported and concluded hiccup will be short-lived
• Increased holdings approximately $10 below price trimmed in Q3
• Trading around 11x next year’s estimates at time of purchase

Added to Fluent, Inc. (FLNT): 

• Digital marketing services company
• Earnings weakness in third quarter caused by higher costs from new initiatives and a revenue slowdown management said reversed by mid-October
• Stock price fell when third quarter earnings were reported
• After meeting with management in New York chose to purchase additional shares
• Early January preannounced strong Q4 results and stock price jumped

Added to TriState Capital Holdings (TSC): 

• Novel bank and asset management organization with impressive leadership team
• One of most innovative, efficient, branch-free banking models we have evaluated
• Anticipate exceptional loan growth will continue in their lending niches
• Unique lending categories with incredibly low losses
• Leading deposit growth generating low cost funding source
• Searching for accretive money management acquisitions to further build recurring revenues
• Foresee slower expense growth, leading to earnings growing faster than revenues
• After initial purchase stock price moved up due to above consensus third quarter earnings
• Stock price recently declined when an original private equity owner sold their shares
• Used resulting stock price decline to purchase additional shares to full weighting
• Trading at approximately 12x this year’s earnings estimates and 1.1x book value

Sold Barrett Business Services (BBSI): 

• Outsourced human resources provider and consultant for small and medium sized businesses
• Management executing strategy
• Substantially increased efficiency and expanded margins over last two years
• Stock price rose following strong first half results
• Forecasted upside less than portfolio average
• Previously trimmed to create cash for companies with higher anticipated upside
• Remaining shares sold

Sold Helix Energy Solutions (HLX): 

• Own & operate specialized offshore oil & gas well intervention vessels
• Management executing business plan
• Our research identified three important contracts ending next year
• Concerned contract renewals will be at lower prices than current contract rates
• Trimmed early last year to mitigate future risk
• Share price now higher; sold remaining shares to generate cash for Bonanza Creek purchase

Sold SandRidge Energy (SD): 

• Mid-continent oil & gas producer
• Small weighting in portfolio
• Were waiting for indicators new Chief Executive Officer would transform company
• CEO departed less than a year after joining company
• Prior to departure announcement, CEO involved in acquisition discussions to grow business
• Sold company on day CEO departure was announced

Trimmed Regional Management (RM): 

• Small loan consumer lender
• Strong stock price increase led Regional to be one of largest portfolio weightings
• New loan loss accounting rule may provide a headwind during 2020 transition
• Combination higher stock price with loss accounting uncertainty led us to trim weighting

 

 

Purchased Myriad Genetics (MYGN): 

• Leading provider of genetic testing
• Successfully owned company in the past (sold last year)
• Stock price declined nearly 40% from peak, after sale
• Anticipate widespread reimbursement for novel depression test
• Possible doubling of existing breast cancer testing market
• Growth and expanded market potential of recently acquired prenatal genetic testing company
• Potential for first-ever melanoma test approval
• Near-term and multi-year developments could propel earnings more than four times higher than this year’s results

Added to Trecora Resources (TREC): 

• Specialty petrochemical and wax producer
• Completed a multi-year capital expansion program
• Anticipating management changes will lead to more profitable utilization of their assets
• Free cash flow generation should be significant with completion of plant expansion
• Monetization of non-core copper and zinc mine could generate large cash windfall
• Trading near book value
• Added to portfolio in anticipation of factors above culminating in revaluation of company

Sold Electro Scientific (ESIO): 

• Supplier of laser-based micro-machining primarily for printed circuit boards & semiconductors
• Approximately two weeks after portfolio purchase in fourth quarter company announced sale to MKS Instruments for $30 cash per share – nearly double our purchase price
• Sold half position shortly after announcement
• Sold remainder of position this year

Sold First Internet Bancorp (INBK): 

• Internet based Midwest commercial bank
• Successfully growing loan portfolio
• However, flattening yield curve squeezing margins
• Upside relative to alternatives decreased due to less robust earning assumptions
• Sold to generate cash for opportunities with greater upside
  

Trimmed Barrett Business Services (BBSI): 

• Outsourced human resources provider and consultant for small and medium sized businesses
• Management executing business plan
• Stock price rose following strong Q4 results and 2019 guidance
• Consequently, forecasted upside decreased to less than portfolio average
• Proceeds used to repurchase Myriad Genetics with substantially more expected upside

Trimmed Helix Energy (HLX): 

• Provide specialized well intervention vessels for offshore oil & gas industry
• Management executing business plan
• Our research identified three important contracts ending in two years
• Concerned contract renewals will be at lower prices than current contracts
• Trimmed to mitigate future risk

Trimmed Steelcase, Inc. (SCS): 

• Leading office furniture designer and manufacturer
• Catalysts tied to new products, European sales team improvement and European cost reductions working
• Stock price moved up as catalysts executed
• Higher stock price led to lower upside relative to overall portfolio
• Position trimmed to create cash for companies with higher anticipated upside

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

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