Tieton Capital Management

4700 Tieton Drive, Suite C
Yakima, WA  98908
(509) 965-6488

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2017 First Quarter Letter

March 31, 2017 By Lora Leavenworth

Many of our largest weighted, highest conviction holdings were under pressure this quarter.  We view this as largely routine, yet temporarily aggravating, market movement.  Your account specific results are on the enclosed “Performance Report”.  For comparison, this quarter the Russell 2000 Value Index was down a modest 0.1%, the Russell 2000 Index increased 2.5%, while the larger capitalization S&P 500 was up the most with a 6.1% increase.  (For index descriptions, please see the Client Login section of our website.)

While the market jumped around, we took advantage of the volatility to institute several changes in the portfolio.  Atlas Financial Holdings, a niche insurer, was purchased after an unexpected increase in their loss reserve for a single state.  Following extensive research, we concluded this was an isolated event and bought shares.  CARBO Ceramics is the newest company added to our energy holdings.  Our expectation is that a rebound in well completions will reduce excess inventory, leading to a rebound in product sales and profitability.  ChromaDex Corporation was purchased with the belief this nutritional ingredient company has a new platform compound that could have applications ranging from food to pharmaceuticals.  After several years of product development, the company could be approaching a favorable inflection point.

There were also several corresponding sales during the first quarter to fund the purchases.  Arctic Cat was sold following the announcement that Textron was acquiring them for $18.50 cash per share.  Interestingly, the shares traded above this price and we sold above the acquisition price.  We held Gulfmark Offshore too long, predicting a quicker rebound in the price as investors anticipated a recovery in Gulf of Mexico oil & gas activity.  The company was sold in March.  The new CEO at Investment Technology Group is making meaningful strides with the business.  The share price incorporates enough of the future potential that we chose to sell.  Under the right circumstances, we would be interested in owning this company again.  Vera Bradley management is taking steps to broaden their product appeal while creating freshness for their traditional customers.  Unfortunately, in the current environment it hasn’t been enough to create momentum, leading us to sell our position.

We look forward to the rest of the year as the quality management teams running the portfolio companies execute their strategies with the freedom of substantially less debt than the market.  Additionally, the high conviction positions that impacted Q1 are expected to be significant positive contributors by year-end.

Thank you for your trust.  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.

Filed Under: Quarterly Letters

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