Tieton Capital buys companies, not just stocks, with catalysts to drive the business fundamentals in the future. The investment team identifies businesses with solid competitive positions and has a strong preference for industries where the companies have an ability to differentiate themselves from the competitors. The Tieton Investment Team visits with every company before it is purchased for client portfolios. Often the team visits with the company’s competitors, suppliers, and customers to gain valuable insights into the industry dynamics and the target company. Within this framework, Tieton employs a value approach, buying smaller businesses with market capitalizations that are generally less than $2 billion.
Initially various screens are used to identify businesses that are then analyzed qualitatively relative to Tieton’s Investment Philosophy. If both the valuation and the quality hurdles are fulfilled, then the financial statements are dissected. The portfolio is focused on the Team’s best ideas and under normal circumstances holds 25 to 35 companies. This select approach is designed for the team to have maximum knowledge of the companies owned. Corporate officers often tell us the time devoted to understanding their business, and the detailed analysis, is different from our peers.
Tieton Capital is an “Ugly Duckling Investor.” As the story of the Ugly Duckling goes, the Ugly Duckling was pushed aside because others on the pond did not take the time to understand that the Ugly Duckling really was a young swan. As a value investor, identification of catalysts is central to our investment philosophy and process. We look for companies that other investors have passed over, or have not spent the time to decipher the catalysts that will allow the business to develop and mature into a company that resembles the beautiful swan. Our goal is to buy “Ugly Ducklings” and ultimately sell “Swans.” This process takes time and tremendous effort to interpret the essential details, but has been rewarding for clients over many years.
Portfolio companies generally fall into three categories: business or industry turnarounds, improving earnings growth rates, or businesses that are simply undiscovered by investors. The companies have the ability to generate solid cash flow, are capable of sound returns on the capital employed in the business, have prudent debt levels, and have products or services that add value. The objective of most new positions is to achieve 50% appreciation over the first two years of ownership. The portfolio stays fully invested other than transitionary cash.
Tieton Capital sells a company when it becomes fully priced, a better alternative is identified, the fundamentals relating to the investment philosophy become impaired, or the catalysts fail to materialize.
Tieton Capital is a boutique with an unwavering commitment to its mission to increase clients’ wealth. Tieton has a passion for the process and relies solely on internal, proprietary research — “We Pack Our Own Parachute.” The Investment Team’s past success has been derived from this intensive, research-driven process combined with disciplined, consistent implementation of the well-grounded investment philosophy.