An Active Approach to Finding Value

Projected Changes to the Russell 2000® Value Index

Weight (%)
Weight (%)
Consumer Discretionary 10.7 9.2 1.5
Consumer Staples 3.0 3.8 -0.8
Energy 5.4 4.5 0.9
Financials 27.9 43.1 -15.2
REITs 13.3 n/a 13.3
Health Care 4.6 4.1 0.5
Industrials 12.1 12.0 0.1
Information Technology 10.4 10.5 -0.1
Materials 4.5 3.9 0.6
Telecommunication Services 0.7 0.9 -0.2
Utilities 7.4 8.0 -0.6
Source: FactSet Research Systems Inc. and Heartland Advisors, Inc.
Projected Weight as of 6/16/2016, Current Weight as of 6/17/2016. Real Estate Investment Trusts (REITs). Rebalancing and breakout of REIT sector expected to take effect at start of trading on 6/27/2016. 

The annual Russell rebalance barely makes a ripple at Heartland. After more than three decades of uncovering great businesses at significant discounts, we don’t need to look to an index to figure out what is a value stock — we have our 10 Principles of Value Investing™  for that.  Yet, while the process doesn’t affect whether we invest in a business, we monitor the changes to gain insight into how it may play out for the market.

One item we noted is the weight of Utilities in the Russell 2000® Value Index is little changed at 7.4%. That seems strange. After years of investors flocking to power companies in search of yield, multiples are stretched to an average price-to-earnings ratio of 21.3, with few rating as values in our eyes. To be sure, there are attractive utilities, but they can’t be found simply by picking a name that is part of an index. They require work to unearth.

Our research has led us to a compelling opportunity among partially regulated players. MDU Resources Group, Inc. (MDU), a Utility with construction, pipeline, and energy services business lines fits the mold. The company reported solid earnings this quarter helped by recently approved rate increases. Backlogs for its construction services and materials units also grew considerably during the period and we expect the aggregates business could see improved margins in the quarters ahead. Trading at a 20% discount to our sum-of-the-parts analysis, we believe MDU’s diversified business provides multiple avenues to continue to grow.

These are the kinds of values as active managers we seek to find year round—not just once annually when the calendar tells us it is time to rebalance.
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Heartland Advisors Value Investing Portfolio Manager Bill Nasgovitz

Bill Nasgovitz

Nasgovitz is Chairman and CIO, and Portfolio Manager of the Value Fund and its corresponding separately managed account strategy. He also is President and Director of Heartland Funds. He has 48 years of industry experience, 34 at Heartland.

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Past performance does not guarantee future results.

As of 3/31/2016, Heartland Advisors on behalf of its clients held approximately 0.85% of the total shares outstanding of MDU Resources Group, Inc.

Statements regarding securities are not recommendations to buy or sell.

Portfolio holdings are subject to change without notice. Current and future portfolio holdings are subject to risk.

The statements and opinions expressed in the articles or appearances are those of the presenter. Any discussion of investments and investment strategies represents the presenters' views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. Any forecasts may not prove to be true.

Economic predictions are based on estimates and are subject to change.

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Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

Sector and industry classifications as determined by Heartland Advisors may reference data from sources such as FactSet Research Systems, Inc. or the Global Industry Classification Codes (GICS) developed by Standard & Poor’s and Morgan Stanley Capital International.

Data Sourced from Factset: Copyright 2015 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

Heartland’s investing glossary provides definitions for several terms used on this page.