2019 Fourth Quarter Letter
The decade closed with the toughest year relative to the indexes since 2008. Simply put, it was a weird year for the portfolio. The valuation relative to the market is extraordinarily compelling today and the catalysts have powerful developments materializing. The currently depressed level appears to set the portfolio up for significant outperformance, which also occurred after we lagged in 2008. Your account specific results are on the enclosed “Performance Report”. For comparison, in 2019 the Russell 2000 Value Index increased 22.4%, the Russell 2000 Index rose 25.5%, while the larger capitalization S&P 500 roared 31.5% fueled by big tech companies. (For index descriptions, please see the Client Login section of our website.)
This quarter we initiated a new position in Green Brick Partners, a home builder focused on fast growing metropolitan areas. After sluggish industry wide home sales tied to rising interest rates a year ago, Green Brick is accelerating new community openings. In addition, they hired an experienced leader to enter the first-time buyer market. Tristate Capital Holdings was purchased before they reported third quarter earnings, following a meeting with management at their Pittsburgh headquarters. The stock price jumped after the report and continued to move up since. Apogee Enterprises was trimmed in the third quarter after the stock price rose on a good earning’s report. This quarter earnings were impacted by a temporary hiccup in the Framing Segment. This created an opportunity to repurchase shares after meeting with management in Minneapolis about $10 below the price it was trimmed a few months ago.
Two of the smallest weightings and lowest confidence positions in the portfolio were sold. CARBO Ceramics is taking longer to transition into industrial markets than anticipated. Combined with the unanticipated loss of a large oilfield contract, we believe CARBO will now struggle to generate meaningful profitability over our time horizon. Consequently, the position was sold. SandRidge Energy was sold after the company announced the CEO was leaving. Prior to his departure, acquisition discussions were underway to build a platform for production growth. We were patiently waiting for the company to announce an acquisition before increasing the small weighting. However, the changed circumstances led us to reverse course. Steelcase reported better than expected earnings, but future orders were indicated softer. Hence, the stock was sold after the price rallied. Regional Management’s weighting grew to one of the largest in the portfolio as a result of the strong stock price. Next year earnings are likely to have a headwind from a new loan loss accounting rule. This combination led us to trim the position. If the shares pull back, we would gladly repurchase them in this well-run company.
The year was very frustrating but our confidence in the research is high. Thank you for your patience in our process. 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.