Bottom-up, fundamental research is integral to Heartland’s security evaluation and selection. When analyzing companies, the Investment Team is guided by our proprietary, consistent, and time-tested 10 Principles of Value Investing™, the centerpiece of our investment process since the founding of the Firm.
The 10 Principles™ form the core of Heartland’s process for setting valuation targets for individual securities, determining their intrinsic worth, and driving all buy and sell decisions. Both quantitative and qualitative elements help us identify strengths and weaknesses from multiple perspectives.
Principle 1: Low Price to Earnings
Stocks with low price-to-earnings ratios historically have outperformed the overall market and provided investors with less downside risk than other equity investment strategies.
Principle 2: Low Price to Cash Flow
Strong cash flows give a company greater financial flexibility. When paired with capable management, it can be the foundation for stronger earnings and higher stock prices.
Principle 3: Low Price to Book Value
When a stock’s price is low in comparison to the company’s book value, sentiment about the company or the sector may be overly negative. Potential downside risk protection makes low price-to-book value stocks attractive.
Principle 4: Value of the Company
We seek to appraise the true intrinsic value of each company we evaluate. Our goal is to make prudent investments by purchasing stocks when they trade at a significant discount to our estimate of their true value.
Principle 5: Financial Soundness
We prefer companies with limited long-term debt. Low-debt companies have more flexibility during adverse business conditions because they can direct cash to operations rather than interest expenses.
Principle 6: Catalyst for Recognition
We consider consumer, political, environmental, and other impacts and trends to determine whether a company has a specific catalyst that we believe will cause its stock price to rise.
Principle 7: Capable Management and Insider Ownership
We generally have more than 1,000 meetings with company management teams each year to help us assess the strength of a company’s leadership. We pair this evaluation with information about any significant or increasing stock ownership among a company’s officers and directors because meaningful insider ownership can signal management’s personal confidence in the business. Insider ownership also aligns leadership’s long-term interests with those of shareholders.
Principle 8: Sound Business Strategy
We seek to understand a company’s business strategy by meeting with its management team, and we generally have more than 1,000 of these meetings each year. It’s also common for us to gather opinions from customers, suppliers, and competitors.
Principle 9: Positive Earnings Dynamics
Earnings tend to drive stock prices. We prefer companies that recently have demonstrated improved earnings and that have upwardly trending estimates.
Principle 10: Positive Technical Analysis
A stock’s historic and more recent price movements can help determine future changes. We prefer stocks that are trading within a narrow price range following a previous down trend.
History of the 10 Principles™
Heartland’s contrarian value investing approach is based on key tenets of the investment philosophy championed by Benjamin Graham and David Dodd during the early 1900s.
The 10 Principles™ were developed by Chairman, CIO, and Portfolio Manager Bill Nasgovitz shortly after the bear market of 1973 and 1974. He was inspired after re-reading The Intelligent Investor, first published in 1949. In particular, he was struck by the passage below:
"A stock does not become a sound investment merely because it can be bought at close to its asset value. The investor should demand, in addition, a satisfactory ratio of earnings to price, a sufficiently strong financial position, and the prospect that its earnings will at least be maintained over the years."
These beliefs are at the core of the 10 Principles™.