2021 Second Quarter Letter
The portfolio continued its recent trend and generated another solid quarter. Your account specific results are on the enclosed “Performance Report”. For comparison, during the first half of 2021 the Russell 2000 Value Index popped 26.7%, the Russell 2000 Index jumped 17.5% and the larger capitalization S&P 500 increased 15.3%. (For index descriptions, please see the Client Login section of our website.)
Although the portfolio stock prices moved up strongly in the first six months of the year, they did not keep pace with the upward revision in estimated earnings. As a result, the portfolio is less expensive at the end of June than the beginning of the year. Incredibly, the portfolio is trading at only 7.8x forward 12-month consensus estimates compared to the Russell 2000 Value at 26x and the Russell 2000 at 35x. This is particularly intriguing given the strength of the catalysts developing for the portfolio companies.
During the quarter we continued to increase ownership in DHI Group and Hill International. Both companies’ bookings trends indicate future revenues should track upward leading to faster earnings growth. Fluent was trimmed in the first quarter, then tumbled. We took advantage of the lower price to repurchase shares. The company is upgrading the quality of their traffic and customers. Contrary to the Street’s reaction, we believe this is a significant long-term positive. The NMI Holdings and TriState Capital positions were increased after their prices paused while the market advanced, in spite of strong underlying fundamental trends. We also added to Texas Capital Bancshares after the stock price decreased approximately a third despite favorable developments.
Cash was generated from the sale of Apogee Enterprises. We are concerned there will be a pause in commercial office building construction as remote work is sorted out, leading to softness in their sales. Marlin Business Services was sold after the stock price jumped following the announcement the company was being acquired. ADTRAN, Insight Enterprises, Myriad Genetics and Veritex were each trimmed because the upside was reduced after their stock prices increased meaningfully.
Finally, please join us in welcoming Grant Lawson, CPA to our team. He is having fun learning the operations and trading aspects of the firm. We are enjoying his insatiable appetite to learn.
Thank you very much for your ongoing confidence in Tieton Capital. 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. The Privacy Notice is enclosed for your review. Please contact us if you have any questions.