2017 Third Quarter Letter
Favorable business developments were reflected in some stock prices this quarter. Your account specific results are on the enclosed “Performance Report”. For comparison, in the first nine months of 2017 the Russell 2000 Value Index is up 5.7%, the Russell 2000 Index rose 10.9%, while the larger capitalization S&P 500 increased 14.2%. (For index descriptions, please see the Client Login section of our website.)
Each year there is a normal variance among the various segments of the market. This year the spread between the best and worst performing styles is far greater than normal. Large cap growth is leading the charge while small cap value is far behind. Additionally, the smaller the company, and the more value oriented the company, the greater the headwind. Although frustrating, it is all part of the normal back and forth among styles. No matter the short-term cycle, our in-depth company specific research continues and we believe it will ultimately prove rewarding for your portfolio, as it has in past cycles.
During the more than three years we have owned Customers Bancorp, management generated a remarkable record. We took advantage of one of the lowest valuations the company has traded to increase the weighting. This year a few individually inconsequential events impacted Navigant Consulting. Collectively, these items hit earnings. After meeting with the management team, we concluded these issues would be quickly overcome by the business growth and purchased additional shares. Following an extended meeting with management, additional shares of Super Micro Computer were also purchased. Intel’s recently launched server processor likely places Super Micro at the beginning of one of their strongest cycles in years. TESSCO Technologies’s revenue has grown every quarter since the new CEO joined the company. We anticipate further significant improvements from initiatives that are in their infancy. Plus, the company sports roughly a 6% dividend yield. The combination of management’s execution and investor’s inattention to what likely will happen led us to purchase more shares.
We sold Omega Protein due to increased supply from large Peruvian fisheries in their animal segment combined with unexpected competition in their human group. ZAGG, Inc. was trimmed after the shares grew to 10% of the portfolio, the maximum we will own. A little over a year ago, we purchased the maximum 5% weighting we will buy after investors lost confidence ZAGG management could turn the mophie acquisition to profitability. Our research and ensuing confidence in the team paid off.
Please alert us if you are not receiving statements from your custodian at least quarterly. In addition, your custodial statement should be compared with the report we send you. As always, if the circumstances surrounding your account change such that you believe we should review the suitability of your assets managed by Tieton Capital, please contact us immediately. Thank you for your confidence.