2017 Fourth Quarter Letter
The solid business performance and corresponding stock price movement continued this quarter. Your account specific results are on the enclosed “Performance Report”. For comparison, the Russell 2000 Value Index was up 7.8% in 2017, the Russell 2000 Index rose 14.7%, while the larger capitalization S&P 500 increased a resounding 21.8%. (For index descriptions, please see the Client Login section of our website.)
Over the long-term, small and value companies have outperformed. This year the large growth category outperformed the small value style by a gargantuan 22 percentage points. This disparity is clearly not sustainable, assuming history is a guide. We continue to be confident in our research and the long term.
During the quarter, we purchased Apogee Enterprises. We are siding with management’s ability to dramatically improve their recent acquisitions’ profitability. When combined with ongoing margin enhancement and product extensions, we see potential for several years of earnings growth. Early in the quarter, First Internet Bancorp was added to portfolios. The company has a unique model, leading to faster growth with surprisingly low loan losses. Steelcase was purchased with the belief the company is positioning for the shift in office furniture styling. Plus, the new tax bill could incentivize increased capital expenditures. We also added to several existing positions: CARBO Ceramics and VAALCO Energy with our belief in the energy industry rebound; Key Tronic with the assumption a return to meaningful revenue growth is near; and Psychemedics with the presumption the company is at the beginning of the next wave of new testing volume in Brazil.
After Canyon Bridge’s failed acquisition of Lattice Semiconductor, the remaining shares were sold when the price moved up following an analyst meeting. Myriad Genetics price jumped on enthusiasm for future growth. We felt the price reflected enough future potential that a few shares were sold. Vonage and ZAGG were trimmed to generate cash for the purchases listed above.
A couple quarters ago we noted our then rare opinion that the energy industry would likely turn up due to investment cuts and ongoing demand growth. Since then crude oil inventories fell at a precipitous rate and are now over 50 million barrels below last year. If this continues, the change in the industry could be more pronounced than we originally predicted.
Thank you for your confidence during yet another interesting year. 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 wish you health and prosperity in 2018.