Tieton Capital Management

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

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2018 Second Quarter Letter

July 23, 2018 By Lora Leavenworth

2018 Second Quarter Letter

Our research process and investment patience are paying off this year.  We believe these two principals will continue leading the way to long-term success.  Your account specific results are on the enclosed “Performance Report”.  For comparison, since January 1, the Russell 2000 Value Index is up 5.4%, the Russell 2000 Index is leading with a 7.7% return, while the larger capitalization S&P 500 only rose 2.7%.  (For index descriptions, please see the Client Login section of our website.)

Patience buying smaller, lesser known companies with great managements and catalysts to move the businesses forward can be quite rewarding, even if returns come in spurts.  This quarter is a good reminder the strategy’s results are not linear.  Developments at many of the portfolio companies were simultaneously recognized in the last three months.  It is difficult to determine when investors will identify what companies are accomplishing.  However, to this day, our experience is that with patience, business success is ultimately captured in the stock price.

Insight Enterprises was the one new company purchased in the portfolio this quarter.  Insight provides technology solutions to Fortune 500 companies and governments around the world.  They are successfully integrating a large acquisition with strategic and financial benefits that will likely enhance free cash flow for the next deal.  Their shift to recurring revenue streams is also expected to propel earnings going forward.  We added to insurer Atlas Financial, raising it to the largest weighting we will buy after meetings with management and attending their Analyst Day in May.  Amazingly, the company is trading at less than six times forecasted earnings.  Green Bancorp was raised to a normal weighting.  Management cleaned up the problem energy loans and is likely preparing to sell this Texas business bank in coming years.  Finally, we took advantage of erratic investor trading to rebuild the position in ZAGG at much lower prices than where we trimmed late last year.

Finding cash to fund the Insight Enterprises buy and additions to the existing companies above continued to be our biggest challenge.  Innospec was sold after the stock price rose further, following their first quarter earnings report.  Although management is top notch, the price is reflecting plenty of good news, creating room to redeploy funds to a better alternative.  At the same time, a highly profitable business line may be disappearing over the medium-term, which may not be fully built into the stock price.  Enova was trimmed following the rally after handily beating first quarter earnings estimates.  Management is masterfully executing their business plan; still, the forecasted upside is lessened by the price rise.

Thank you for your confidence, patience and for being a valued client.  Our Privacy Policy is included with this report.  Please contact us with any questions regarding this policy.  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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