2019 Third Quarter Letter
In September the portfolio began to improve and reflect positive company fundamentals after a period of illogical pressure. Your account specific results are on the enclosed “Performance Report”. For comparison, in the first nine months of 2019 the Russell 2000 Value Index is up 12.8%, the Russell 2000 Index rose 14.2%, while the larger capitalization S&P 500 increased 20.6%. (For index descriptions, please see the Client Login section of our website.)
We are pleased with how your account is positioned and its unusually compelling valuation. Half the companies are trading at or below 10x the next 12 month’s forecasted earnings. Last quarter this same statistic was 12x earnings. Despite the portfolio companies reporting second quarter earnings growth, the stock prices irrationally declined. As a result, the valuation became more enticing. We patiently await the market recognizing the high quality, low-debt companies for their earnings fundamentals and favorable prospects.
No new purchases or complete sales of existing positions took place this quarter. We researched many new companies, but none motivated us to initiate a trade relative to the portfolio holdings. We believe this bodes well for future results of the companies owned. Geospace Technologies was the most significant activity in the quarter. We meaningfully raised the weighting in advance of what appears to be increasing rentals of their new offshore seismic product, as well as heightened interest within the U.S. government to purchase their revolutionary border security offering. AdvanSix and Medallion Financial were both increased early in the quarter in response to their catalysts nearing fruition while their share prices pulled back. ZAGG was increased shortly before they announced hiring an investment banker to explore the sale of the company because investors aren’t recognizing the value of the business.
Funds for the purchases this quarter came from several positions that were trimmed. Apogee, Barrett, Steelcase and Insight Enterprises were reduced when we concluded that the size of these positions was not justified by the forecasted upside over our two-year time horizon. Since Insight was trimmed, they closed an attractive acquisition that may lead to improved growth prospects.
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.