2020 Third Quarter Letter
Your portfolio had a strong start in the third quarter before taking a pause in September. Your account specific results are on the enclosed “Performance Report”. For comparison, during the third quarter the Russell 2000 Value Index improved 2.6%, the Russell 2000 Index rose 4.9%, while the S&P 500 increased 8.9%. Year-to-date the Russell 2000 Value Index is down 21.5%, the Russell 2000 Index fell 8.7%, while the larger capitalization S&P 500 is up 5.6%. (For index descriptions, please see the Client Login section of our website.)
Today correlations exist between many current market statistics and the technology bubble of the late 1990s and early 2000s. The market’s concentration is extreme; approximately 25% of the S&P 500 is comprised of the five largest companies (renowned technology names). This meaningfully surpasses the previous high reached in 2000. The valuation differential between the growth and value styles is also beyond what was seen at the peak of the technology bubble. Initial public offerings have soared to the highest level since the bubble. Finally, the Russell 1000 Growth Index (large cap growth) is up 24.3%, far outpacing the Russell 2000 Value Index’s (small cap value) 21.5% decline – an unimaginable 45 percentage point spread in only nine months.
Historically, when these trends reversed it was powerful! For perspective, over the five years beginning January 1, 2000 the Russell 2000 Value Index was up over 121% while the Russell 1000 Growth Index declined nearly 39%. We are not predicting a repeat, but we do believe it is instructive when considering possible future market paths and asset allocations.
In the quarter we added NMI Holdings to your portfolio. NMI is a rapidly growing mortgage insurer with strong underwriting and a risk pricing engine that yields them a competitive edge over their larger competitors. In addition, we hypothesize that the strength of the housing market driven by historically low interest rates and by COVID will allow NMI to avoid significant losses. Also new to your portfolio is Vishay Precision Group. Vishay provides precision sensors to a variety of end markets. We expect accelerating organic growth to drive meaningful margin improvements. Finally, increasing adoption of the internet of things (IoT) technology should be a tailwind to their business for the foreseeable future.
The sale of Benefytt Technologies in the quarter generated cash needed for these purchases. Benefytt announced they were being acquired at $31.00 a share, a meaningful premium to its recent share price.
Thank you for your confidence. 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.