2018 First Quarter Letter
We entered 2018 on a positive note with the recently passed tax reform creating a backdrop of corporate optimism. As the quarter progressed, we faced increased volatility as market participants grew concerned about inflation, interest rate hikes and a possible trade war. Your account specific results are on the enclosed “Performance Report”. For comparison, this quarter the Russell 2000 Value Index was down 2.6%, the Russell 2000 Index held up the best, declining 0.1%, while the larger capitalization S&P 500 was down 0.8%. (For index descriptions, please see the Client Login section of our website.)
Trading activity was elevated this quarter, driven by several new companies where the research process crystallized, as well as additions to existing companies as opportunities presented themselves. We purchased SandRidge Energy after Midstates Petroleum made an offer to acquire SandRidge. We like the Midstates model and management team and believe buying SandRidge is likely an excellent chance to effectively purchase Midstates at a discount. The addition of Health Insurance Innovations adds a unique company with a platform for selling and servicing individual medical insurance plans and related products. The company takes no underwriting risk and is experiencing strong growth.
Finding cash to fund these purchases and the additions to existing companies was a challenge. To generate the cash needed for these purchases several companies were exited this quarter. Vonage Holdings was sold since the upside appears limited after strong performance over the last several years. We determined that Navigant Consulting was at a fortunate sell point as the share price held up better than the business was performing due to an activist investor. The current relaxed regulatory environment makes growth challenging for the company. Liberty Tax was the final sale this quarter. The founder, who was fired by the board of directors last fall, has been managing the company through the board seats he still controls. This led the auditors and a number of independent board members to resign. With these changes we lack confidence in the leadership and direction of the company.
Looking forward we are eager to see how these changes impact the portfolio. We believe the prospects for the new companies, as well as the existing portfolio, have great opportunity to appreciate as the year progresses. In addition, we surmise that the economy is likely to experience another solid year as the benefits of the tax cuts move through corporate and individual pocket books.
Thank you for your confidence. Form ADV Part 2 was e-mailed to you earlier this year. If you didn’t receive the e-mail and would like a copy, please contact us. Alternatively, it is also available on the TietonCapital.com website. 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.