Heartland Opportunistic Value Equity Strategy 3Q17 Portfolio Manager Commentary

Executive Summary

  • The portfolio’s Health Care names helped the Strategy outperform its benchmark, the Russell 3000® Value Index, returning 4.42%† versus 3.27%.
  • The major indices continued to edge higher in response to solid economic news even as new doubts emerged.
  • Oil fluctuated in a narrow range for much of the quarter but a late surge in September made Energy one of the top performing groups in the Index.
  • We are beginning to see more small-cap companies on our watch list than in the recent quarters.

Third Quarter Market Discussion

The major indices continued to edge higher in response to solid economic news, but investors began to ask “where do we go from here?” The question reflected uncertainty on several fronts. Prospects for pro-growth legislation out of Washington appear to be on hold, geo-political hotspots such as North Korea continue to flare up, and the recovery in oil remains uncertain, which could impact cyclical areas such as Industrials.
 
The cautious outlook led to strength in defensive sectors and prompted investors to continue to pour money into growth areas that have had positive momentum for much of the year. 
 
Putting a Premium on Defense
Russell 3000® Value Index Third Quarter Sector Returns

Heartland Select Value Fund Portfolio Manager Commentary Sector Returns Chart

Source FactSet Research Systems Inc. and Russell®
Holdings data as of 7/3/2017 to 9/29/2017. All indices are unmanaged. It is not possible to invest directly in an index.
Past performance does not guarantee future results.

Attribution Analysis

Security selection was positive, and the portfolio’s Health Care names helped the Strategy outperform its benchmark, the Russell 3000® Value Index. Our Financial names also boosted results and were up on an absolute and relative basis. Oil fluctuated in a narrow range for much of the quarter, but a surge in September boosted Energy and it was a top performing group in the Index. The portfolio’s names in the sector were also up and buoyed relative results.

Heartland Advisors value investing portfolio commentary consumer discretionary sector icon

A healthy outlook. With any significant changes to the Affordable Care Act off the table in the near-term, investors looked beyond the Health Care sector in search of opportunities. However, the portfolio’s holdings were up sharply, and the group contained a top contributor.

Triple-S Management Corporation (GTS), a managed care company in Puerto Rico that operates under the Blue Cross name, was up significantly after posting results that beat consensus estimates. Wall Street also cheered signs of improving loss ratios and progress on cost-cutting initiatives. We remain constructive on the name and believe there are emerging signs reimbursement rates it receives from Medicaid are on the cusp of improving. Despite the run up in share prices, the company trades at just two-thirds of book value versus 2x to 10x for peers.

Heartland Advisors value investing portfolio commentary finacials sector icon

Making it work in Energy. As the price of crude fluctuated, we found strength in the equipment and services industry. Newpark Resources, Inc. (NR), an energy services company, was up after reporting earnings before interest, taxes, depreciation, and amortization (EBITDA) well above Street estimates. Results were boosted by strength in the company’s so-called Mat Services line, which provides temporary access roads and worksites for oilfield, military, construction and utilities applications.

Strength from the Mats division point to inroads the company has made in broadening its client base beyond the Energy patch. We also believe its fluids division, which includes environmentally friendly products used in oil drilling, offers future top-line growth opportunities. The fluid division is now the third-largest player in the industry and we believe its unique products will help the company increase its position going forward. 
 
Based on current multiples of just 1.7x stated book value (SBV), we believe Newpark has significant upside and could eventually trade at 2x SBV.
 
Full stream ahead? Facing stubborn pricing pressure in the energy markets we continue to focus on names like Newpark that are positioned to succeed at current oil prices.  Baker Hughes, a GE Company (BHGE), in our view, also fits that mold.
 
Baker Hughes completed its merger with General Electric’s energy division in early July. The combination makes the new company the second-largest player globally in the oil services industry. The deal creates a business that can provide products for all stages of the energy cycle—from upstream exploration to midstream pipelines and downstream refining and power generation. The breadth of its offering should give it a competitive advantage and has already resulted in it winning a significant project in Papau New Guinea. Shares of the company were down as the outlook for some of its end clients weakened, however the combined entity should also have significant opportunities for cost savings and its competitive positioning should allow it to capture a larger portion of global sales.
 

Portfolio Activity

We’ve taken strength in many of our names as an opportunity to harvest gains and redeploy assets elsewhere. These moves, we believe, have resulted in a portfolio that should be well positioned whether the economy continues to churn higher, or experiences a temporary setback. As part of this approach, we continue to seek attractively valued businesses that are leaders in their fields. The Strategy’s exposure to Information Technology and Energy is down while we have identified opportunities in some previously expensive areas such as Consumer Staples.
 
Brewing up value. Recent addition J.M. Smucker Company (SJM) is an example of the type of business we’ve found attractive. The company manufactures and markets food products under well-known brands such as Jif peanut butter, Meow Mix cat food and Folgers coffee. Shares have been under pressure as private label products gain market share and competitors have cut prices in order to compete. The surge in competition and price cutting culminated in first-quarter earnings that fell short of investor expectations, and the stock faltered. We viewed the weakness as an opportunity to pick up a market-leading franchise with strong free cash flow generation at a 20% discount to the broader market.
 
Despite current headwinds in the industry, we believe new coffee products Smucker is rolling out, as well as its pet division, should produce strong revenue growth in the years ahead.
 

Outlook and Positioning

Heartland Select Value Fund Portfolio Manager Commentary Quote

With fewer catalysts for expansion on the horizon, the economic outlook is clouded. Larger companies have enjoyed strong performance for much of the year and the valuation advantage they held over smaller counterparts has shrunk. Companies that have enjoyed strong runs over the past few months may face reduced upside until evidence of continuing business cycle strength emerges. 
 
In response, we continue to comb through all sectors and industries looking for opportunities with leading industry players where we believe risk is mispriced. Our efforts have resulted in a portfolio that is less economically sensitive and a watch list that contains more small-cap companies than in the recent quarters. 
 
Thank you for the opportunity to manage your capital.
Please wait while we gather your results.

Portfolio Management Team

Heartland Advisors Value Investing Portfolio Manager Colin McWey

Colin McWey

McWey, CFA, is Vice President and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He has 15 years of industry experience, 8 at Heartland.

Heartland Advisors Value Investing Portfolio Manager Will Nasgovitz

Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Select Value and Mid Cap Value Funds and their corresponding separately managed account strategies. He also is CEO of Heartland Funds. He has 17 years of industry experience, 13 at Heartland.

Composite Returns*

9/30/2017

Scroll over to view complete data

Since Inception (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD (%)QTD (%)
Opportunistic Value Equity Composite (Net of Advisory Fees)**10.276.1212.378.4917.917.124.42
Opportunistic Value Equity Composite (Net of Bundled Fees)8.174.0610.186.3615.595.523.89
Russell 3000® Value7.186.0113.208.7915.537.723.27

Source: FactSet Research Systems Inc., Russell Investment Group, and Heartland Advisors, Inc.

Email Sign Up

  • I am a financial professional or institutional investor
  • I am an individual investor
Financial Professionals & Institutional Investors
Individual Investors

Name

Email

 

Heartland Perspectives

Heartland Perspectives


Product Insights

Select Value Fund

Mid Cap Value Fund

Value Plus Fund

Value Fund

International Value Fund

Opportunistic Value Equity Strategy

Mid Cap Value Strategy

Small Cap Value Plus Strategy

Small Cap Value Strategy

Terms of Use
These email lists are created for use by U.S. investment professionals only and are published strictly for informational purposes. Providing access to the content of these emails does not explicitly or implicitly constitute a solicitation of services or products of Heartland Advisors, Heartland Funds, or any of their affiliates. The information contained in these emails is not intended for distribution to, or for use by, investment professionals in a jurisdiction where distribution or purchase is not authorized. The information contained in these emails is not appropriate for use by individual investors. By registering for any of these emails, you agree to Heartland’s terms and conditions and that you are qualified as an institutional investor or otherwise member of a registered broker/dealer, registered investment advisor, or investment consulting firm.
I agree to the Terms of Use and confirm that I am a financial professional

Monthly enews

©2017 Heartland Advisors | 789 N. Water Street, Suite 500, Milwaukee, WI 53202 | Business Office: 414-347-7777 | Financial Professionals: 888-505-5180 | Individual Investors: 800-432-7856

†Composite return is net of advisory fees.
*Performance data is preliminary. Yearly and quarterly returns are not annualized. The Strategy's inception date is 9/30/1999.
**Provided as supplemental information.

Past performance does not guarantee future results.

In addition to stocks of large companies, the Opportunistic Value Equity Strategy invests in stocks of small- and mid-cap companies that are generally less liquid than large companies. The performance of these holdings generally will increase the volatility of the strategy’s returns.

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

Heartland Advisors, Inc. (the "Firm") claims compliance with the Global Investment Performance Standards (GIPS®). The Firm is a wholly owned subsidiary of Heartland Holdings, Inc., and is registered with the Securities and Exchange Commission. For a complete list and description of Heartland Advisors composites and/or a presentation that adheres to the GIPS® standards, contact the Institutional Sales Team at Heartland Advisors.

As of 9/30/2017, Baker Hughes, a GE Company, J.M. Smucker Company, Newpark Resources, Inc., and Triple-S Management Corporation represented 1.92%, 1.20%, 2.54%, and 3.09% of the Opportunistic Value Equity Composite, respectively.

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. The specific securities discussed, which are intended to illustrate the advisor’s investment style, do not represent all of the securities purchased, sold, or recommended by the advisor for client accounts, and the reader should not assume that an investment in these securities was or would be profitable in the future. Certain security valuations and forward estimates are based on Heartland Advisors’ calculations. Any forecasts may not prove to be true.

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

There is no guarantee that a particular investment strategy will be successful.

The U.S. dollar is the currency used to express performance.

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.

Heartland Advisors defines market cap ranges by the following indices: micro-cap by the Russell Microcap®, small-cap by the Russell 2000®, mid-cap by the Russell Midcap®, large-cap by the Russell Top 200®.

Because of ongoing market volatility, performance may be subject to substantial short-term changes.

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

CFA® is a registered trademark owned by the CFA Institute.

Separately managed accounts and related investment advisory services are provided by Heartland Advisors, Inc., a federally registered investment advisor. ALPS Distributors, Inc., is not affiliated with Heartland Advisors, Inc.

top