2012 Q2 Client Letter

July 12, 2012

Dear Twinleaf Client:

Market conditions were difficult in the second quarter of 2012 as macro events, led by the European sovereign debt crisis and a weak economic recovery in the USA, weighed on stock prices.  While the S&P 500 and the Russell 2000 were each down by more than 3% in the quarter, Twinleaf client accounts were down by a slightly better 2.4%, including fees, and our relative outperformance has accelerated in the first two weeks of July as two of our largest positions have risen nicely.    

We believe that the small cap space provides the most interesting investment opportunities in the stock market today and we remain highly focused on companies that are undervalued and misunderstood, especially ones that are returning cash to shareholders or should soon be in a position to do so.  Indeed, about 70% of Twinleaf portfolio companies are returning cash to shareholders via share repurchases and/or dividends and our accounts average a 1.2% annual yield, well above most small cap funds and only 30 basis points below the 10-year Treasury bond yield.  In addition, client accounts include two, possibly three, companies that are overcapitalized with balance sheet cash and therefore excellent candidates to issue a special dividend or begin paying a regular dividend to shareholders later this year.

Our stock picking continues to favor technology, media and telecom (TMT) companies with about 80% sector exposure, though two of our top four holdings are not TMT names.  With a solid TMT background, we feel most comfortable in the space and we believe that revenue and cash flow growth rates are high in TMT names while investor understanding is relatively low.  We also believe that the potential for M&A activity is excellent and though we haven’t yet had an M&A exit, we are well positioned for one or two.

Finding cheap stocks – value investing -- is a core tenet at Twinleaf.  Our client portfolios contain stocks with a weighted average Enterprise Value to EBITDA (EV/EBITDA) ratio of about 6x versus an EV/EBITDA of about 8.5x for S&P 500 companies.  We even own a couple of unappreciated companies at a 3x multiple valuation.

Our best performing stocks in the quarter were Crown Media (CRWN), up 10%, and SeaChange (SEAC), up 6%.  A recent blog post on the Twinleaf web site (and at www.seeekingalpha.com) reveals a bit of our investment thesis on both companies.  We were opportunistic in the gloomy month of May and picked up shares of Cablevision (CVC) near the trough of its 30% month-long plunge as it briefly went under $3 billion in market capitalization.  Client accounts now own a premier cable/broadband operator at a very attractive valuation and one that is repurchasing stock aggressively and carries a 5.4% dividend yield at our cost basis.

At Twinleaf, we take a longer term investment outlook and encourage our clients to similarly do so but we are cognizant of the need to outperform quarter to quarter.  So while we bettered our most relevant benchmark indexes in the quarter, we are unsatisfied with a negative quarterly return.

Thank you for your support and trust.

Sincerely,
Spencer Grimes