The market rebound that began after the Brexit vote turbulence was powerfully resurrected following the Trump victory. Your account specific results are on the enclosed “Performance Report”. For comparison, this year the Russell 2000 Value Index skyrocketed 31.7%, the Russell 2000 Index rose 21.3%, while the larger capitalization S&P 500 is up 12.0%. (For index descriptions, please see the Client Login section of our website.)
The market rally brings the distinct challenge of evaluating whether the enthusiasm for more robust economic activity under the new administration will translate into enough additional earnings growth to justify some of the big stock price moves. Keeping this in mind, we are using this move to trim or exit positions that have risen more than we believe is warranted and to add to companies that aren’t receiving the recognition we deem appropriate.
During the quarter Green Bancorp was added to the portfolio. This Texas bank is expected to rebound from the trouncing it took when the energy industry was hit. Liberty Tax was purchased at less than 10x this year’s earnings and over a 4% dividend yield. Growth of their offices over several years could meaningfully drive the business. The last new company purchased was Nautilus, Inc. We successfully owned this company twice in the previous 20 years. An acquisition, new products and our belief investors overreacted to consumer data in the summer led us to rebuy the company. We also completed the purchase of a full weighting in Marlin Business Services. Now we await favorable business developments from their initiatives to accelerate growth.
HomeStreet, Inc. was exited after the share price moved up post-election. We expect higher interest rates will diminish mortgage demand, hurting their largest profit contributor in the near-term. The final piece of MGP Ingredients was also sold. The company was purchased last year before it was discovered by investors. The CEO’s brilliant turnaround of the business is now recognized and the founding family is selling shares. Innospec, Navigant Consulting, Omega Protein and Vonage were all trimmed after the stock prices increased, which diminished their forecasted upside. Interestingly, each of these companies also have insiders selling shares.
We continue to be highly enthusiastic about the quality of the leadership running the companies owned in the portfolio. This enhances our future expectation potential. We sincerely appreciate your confidence in our ability to identify high quality management teams. 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. We hope your Holiday Season was filled with special memories.