2018 Third Quarter Letter
The third quarter was choppy as some holdings retreated from recent advances. Your account specific results are on the enclosed “Performance Report”. For comparison, in the first nine months of 2018 the Russell 2000 Value Index is up 7.1%, the Russell 2000 Index rose 11.5%, while the larger capitalization S&P 500 increased 10.6%. (For index descriptions, please see the Client Login section of our website.)
Over the quarter we continued to struggle to determine what positions to sell or trim to raise cash for additions in the portfolio. Usually, after the market experiences an extended period of positive results, as it has since the Great Recession, it is easier to identify cash for purchases. However, today we have confidence in the upside opportunity that still exists in the current holdings. We are also finding new companies with remarkable upside. As we toil to identify the optimal portfolio mix, you likely will see changes that we believe will position your portfolio to generate the greatest returns.
Customers Bancorp has been a portfolio holding for some time. They have done an impressive job building a notable banking franchise in leading east coast markets with a desirable loan portfolio. We took advantage of short-sighted price pressure to increase the weighting. ChromaDex’s share price drifted this year. Yet, the case continues to build for their NIAGEN product with the ongoing release of favorable research study results. In addition, the company is seeing traction in the Asian markets it recently entered. With this in mind, we took the company to a full weighting. Additional shares of Atlas Financial were purchased after many meetings with management over the last several months. We concluded their recent reserve challenges were exacerbated by industry leading technology investments that will save the company money on claims costs in the long-run. We believe the management team at this company is second to none and is creating a market leader.
Our appreciation of Enova International and their analytics driven approach to online lending continues. However, we determined it was prudent to take advantage of the price rise this year and redirect funds to Atlas. Myriad Genetics was also reduced following the share price running in response to sales momentum resuming. We concluded this sales inflection was likely after extensive research led us to substantially increase the weighting in early 2017.
Please alert us if you are not receiving statements from your custodian at least quarterly. In addition, your custodial statement should be compared with the report we send you. 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. Thank you for your confidence.