2019 Second Quarter Letter
The low level of debt in the portfolio is especially comforting with the uncertainty surrounding global trade and perpetual concerns of economic activity slowing. Your account specific results are on the enclosed “Performance Report”. For comparison, during the first half of the year the Russell 2000 Value Index was up 13.5%, the Russell 2000 Index jumped 17.0%, while the larger capitalization S&P 500 rocketed up a first half record 18.5%. (For index descriptions, please see the Client Login section of our website.)
Investor uncertainty led many companies in the portfolio to trade at levels that appear wildly inconsistent with the value of the assets. In stark contrast to the popular “FANG” stocks, over half the companies in the portfolio are trading at less than 12x their forecasted income in the next 12 months, while approximately 75% are trading under 2x book value. As confirmation of what we believe are undervalued businesses, we see an increasing number of companies repurchasing stock and officers buying shares.
Nearly a year ago Myriad Genetics was sold after the stock price became fully valued and better alternatives were identified. The stock price fell significantly after our exit. A visit to the company in February provided confidence reimbursement for currently unreimbursed tests would increase dramatically. Additionally, a medical review in the next year could nearly double their core market. As a result, during the first quarter we began rebuying Myriad. The second round was finished this quarter.
Atlas Financial was our biggest disappointment in years. The company made successful process changes over the last three years that appear to be leading to lower claim payments. However, our premise that reserves would not require further strengthening was wrong. The ensuing loss from increasing reserves reduced capital levels to concerning levels. We think they will need to raise additional capital and dilute shareholders. As a result, the shares were sold. Helix Energy Solutions was trimmed due to uncertainty around renewal pricing of contracts that conclude in a couple of years.
Thank you for your patience. The low level of trading in the second quarter indicates our conviction in the portfolio. We visited many companies already this year and our enthusiasm is high for what the company leaders are creating. If it weren’t for our on-site visits and our ongoing research into how the businesses are developing, it would be difficult to be as patient as you. Once again, thank you for your confidence in our analysis and patience with the process.