2013 Q2 Client Letter

July 2, 2013

Dear Twinleaf Account Holder:

Second quarter 2013 was an excellent one for Twinleaf-managed client accounts as the market began to recognize the value of several of our portfolio companies, most notably Marchex (MCHX), Crown Media (CRWN) and Envivio (ENVI), which rose 43%, 20% and 19% in the quarter, respectively. We even got an M&A event for one of our stock holdings, as Multiband (MBND) agreed to sell itself in May at a nice premium. 

Net of management fees, Twinleaf accounts were +12.45% in Q2 and are +29.63% YTD. By comparison, the S&P 500 was +2.91% in Q2 and +13.82% YTD; the DJIA was +2.91% in Q2 and +15.20% YTD; Nasdaq was +4.52% and +13.42% YTD and Russell 2000 was +3.08% and +15.86% YTD.

Not everything worked as we envisioned. TiVo (TIVO), one of our larger client positions, was punished by the market in June for agreeing to a disappointing settlement of patent litigation with Motorola (Google/Arris) and Cisco. Though cash proceeds from the settlement came to about $4 per TIVO share ($490 million), investors were looking for north of $1 billion. TIVO is representative of our investment style in that it is a misunderstood stock -- perceived by the market as a fading DVR company focused on selling clunky hardware at retail and with no more patent litigation upside. We take the bull case that TIVO’s advanced television services business, now with a dozen MSO customers in the US and Europe, will surprise on the upside with cash flow generation. Its cash-rich balance sheet – some 80% of its market cap is in cash -- will allow aggressive share repurchases and with litigation behind it, we see TIVO selling itself in the next 18 months at a valuation at least 50% higher than today’s market value. Accordingly, we’ve been buying more TIVO shares for client accounts under $11. 

Despite the market’s strong performance in 2013, we’re still finding overlooked stocks and have initiated positions in new names for client accounts in recent weeks without deviating from our core investment criteria: buying undervalued names with a catalyst for appreciation. Recall that a primary Twinleaf investment consideration is that a portfolio company could become an M&A target within a reasonable period of time. We believe that every one of our new and longer-held ideas fits this description and we’re confident that we’ll have our M&A thesis validated over time. But even if it isn’t, clients will own solid companies at single digit valuation multiples of cash flow. 

We look forward to the second half of the year. Thanks for your support.


Spencer Grimes