2017 Second Quarter Letter
The portfolio was essentially unchanged this quarter with the favorable developments offset by consolidation in the energy sector. Your account specific results are on the enclosed “Performance Report”. For comparison, this year the Russell 2000 Value Index is nearly flat with a modest 0.5% rise, the Russell 2000 Index increased 5.0%, while the larger capitalization S&P 500 is leading, up 9.3%. You may recall in 2016, the S&P was the laggard. (For index descriptions, please see the Client Login section of our website.)
The questions overhanging energy are primarily focused on the approximately 10 million barrels of oil produced per day in the United States. There is minimal regard for the impact that the last three year’s slashed spending will have on the other 85 million barrels produced around the world. You can be sure our research will continue testing against our positive thesis.
Enova International, an online, small loan lender, was purchased in the portfolio this quarter. Management completed repositioning the company last year. We believe there are several segments of the business that could move the needle, ranging from small business lending to opportunities in Brazil. Atlas Financial Holdings was originally added to the portfolio in the first quarter. Additional shares were purchased this quarter after further research increased our confidence in the direction of the business. This analysis was confirmed, and the above average weighting rewarded, when the company reported first quarter earnings solidly above expectations. VAALCO Energy’s leadership has done a stellar job positioning the company to be profitable at current oil prices by reducing their cost structure. When the stock price sagged, we used the opportunity to increase our ownership.
Although Nautilus was purchased late last year, we sold the company out of portfolios when their head of product development left the company. One of the original tenets of owning the business was new products driving future revenues. This may still happen; however, we prefer to evaluate evidence of success from the new R&D officer before owning shares again. Lattice Semiconductor was trimmed another time with the increasing likelihood the U.S. Government does not approve their acquisition by a Chinese backed entity. The proceeds were used to finish buying Enova.
Highlighting the intensive research taking place behind the scenes, we visited over 100 management teams, factories, nonproduction locations, competitors, customers and suppliers in over 25 cities during the last year. In addition, there were countless phone calls with companies and hours scouring corporate filings. We look forward to this research once again creating meaningful asset increases for you.