Valuations: An Antidote to Uncertain Times

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 dollar weakened.
 
As investors digested each new piece of news, many stuck with the familiar and momentum, growth, and perceived safe havens continued to propel stocks higher. As long-term investors, we believe dwelling on news headlines and geopolitical events is causing many to take on unseen risks. 
 
With the major indices at historically high multiples, chasing returns can lead to overpaying for stocks. Our approach focuses on avoiding that chase by digging into traditional valuation metrics such as price/earnings and price/sales—and by buying companies at a discount to our estimates of their intrinsic value. Put simply, valuations DO matter.
 

A return to fundamentals?

While no one can predict when the current pattern of a macro-driven market will end, we do have some thoughts on what may lead to a change. If data starts to confirm the economy is strong enough to stand on its own, or valuations for momentum, growth, and defensive stocks become too bloated to ignore, we believe investors will rediscover the importance of equity prices and valuations. Such a pivot should materially benefit shares of attractively valued businesses, including micro-caps and others not currently held in the major indices.
 

Once the tide turns

Given the near decade-long length of the growth-over-value cycle, as shown in the chart below, we expect change will come quickly when the tide finally turns. Investors may have gotten a preview during the last few months of 2016 when economic confidence surged and attractively valued stocks outperformed their frothier peers.
 
Russell 3000® Value Less Russell 3000® Growth Index
10-Year Annualized Rolling Returns
Heartland Advisors Value Investing Market Insight 10-Year Annualized Rolling Returns Chart
Source: Furey Research Partners, LLC and Russell®, 12/31/1978 to 9/30/2017, annualized return over rolling 10-year periods. Additional information for indexes shown at end of material. All indexes are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.
 
As value investors, Heartland will welcome the change and our investors should be well positioned for it.
 
We thank you for your continued trust and confidence. 
 
Sincerely,
Your Heartland Team

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Additional Information for Indexes in Chart (calendar year returns %):

    1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 YTD 2017*
Russell 3000® Growth Index   12.00 34.68 -1.31 41.66 5.22 3.69 2.20 36.57 21.88 28.74 35.02 33.83 -22.42 -19.63 -28.03 30.97 6.93 5.17 9.46 11.40 -38.44 37.01 17.64 2.18 15.22 34.24 12.44 5.09 7.39 20.43
Russell 3000® Value Index   23.63 24.22 -8.85 25.41 14.90 18.65 -1.95 37.03 21.59 34.83 13.50 6.65 8.04 -4.33 -15.18 31.14 16.94 6.85 22.34 -1.01 -36.25 19.76 16.23 -0.10 17.56 32.69 12.69 -4.13 18.40 7.72

*Not annualized as of 9/30/2017
Source: FactSet Research Systems Inc. and Russell®

Past performance does not guarantee future results.

An investor should consider the Funds’ investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information may be found in the prospectus (pdf). To obtain a print prospectus, call 800-432-7856. Please read the prospectus carefully before investing.

Investing involves risk, including the potential loss of principal.

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

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

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.

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®.

Growth and value investing each have unique risks and potential for rewards and may not be suitable for all investors. A growth investing strategy emphasizes capital appreciation and typically carries a higher risk of loss and potential reward than a value investing strategy; a value investing strategy emphasizes investments in companies believed to be undervalued.

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

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