2020 Second Quarter Letter
We hope you are healthy and well. Portfolios enjoyed a solid rebound this quarter. Your account specific results are on the enclosed “Performance Report”. For comparison, during the second quarter the Russell 2000 Value Index rose 18.9%, the Russell 2000 Index jumped 25.4%, while the S&P 500 was up 20.5%. Over the first half the Russell 2000 Value Index dropped 23.5%, the Russell 2000 Index declined 13.0%, while the S&P 500 is down 3.1%. (For index descriptions, please see the Client Login section of our website.)
This recession was caused by unemployment; traditionally unemployment is an outcome of a recession. As a result, companies rapidly cut costs, Congress moved quickly to put money in the hands of consumers and the Fed cut rates before economic damage was obvious. The combination of these actions blunted the impact of the near halt to the economy. Today the economy is showing multiple signs of rebounding off the April lows. As was the case in 2008/2009, portfolio executives are talking about exiting the recession stronger than they entered. We believe our strong management teams’ ability to think this way is largely a function of their low debt. Another positive signpost we saw this quarter was an increase in insider buying. Activity was especially pronounced in April but has continued since.
During the quarter we bought Barrett Business Services after selling it earlier this year nearly $50/share higher. Incredibly, recent company changes position it better than when we sold. After Fluent dropped in the March meltdown we increased the weighting. Fluent is making compelling changes that appear to be accelerating its growth. TriState Capital was pummeled when the market fell. After reanalyzing the business, we concluded they were in fact benefiting from the economic circumstances and increased the weighting at a price 50% below the prior purchase. Early in the quarter Bonanza Creek Energy and VAALCO Energy were trimmed slightly to reduce the risk we saw coming from oil storage filling near capacity. ChromaDex was also trimmed when the stock price jumped, and the weighting rose, after the company announced promising coronavirus immunity research.
Increasing data from third parties indicates that small value is the market segment with the largest rebound out of recessions. This is also our experience. The underlying fundamentals of the portfolio combined with the stock price drop we saw in the meltdown lead us to believe history likely repeats itself.
Your confidence, personal concern and patience are appreciated. We believe the portfolio is positioned well for future economic improvements. The Privacy Notice is enclosed for your review. 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.