Scenario 3: A Duration Call

In the mid-cap portfolio, we have four general investment categories that spread across the value and deep value buckets.



Express Scripts, ticker ESRX, is a classic duration call in our view.

This is the largest standalone pharmacy benefit manager in the health care supply chain.

We bought Express Scripts in the face of significant skepticism around its ability to compete with UnitedHealth’s emerging offering, and there was significant skepticism around Amazon's potential entry into the drug supply chain, which we felt was completely overblown.

We felt that Express’ value proposition was on solid ground, with significant economies of scale and value-added services that set it apart from potential entrants.

It's a complex business that requires significant sourcing scale, benefit design expertise, claims management, formulary management, and a host of other capabilities.

We felt that the incumbency advantage to Express was significantly underappreciated.

Away from assessing competitive threats, we saw significant value in Express as the largest standalone benefit manager in a consolidating health care supply chain. We felt that Express might be an attractive acquisition target for a larger health care player that needed to round out its competitive offering.

Since our purchase, we have seen most aspects of our investment thesis play out.

It was announced earlier this year that Express Scripts will be merged with Cigna, a large managed-care player. We sold a good chunk of Express on the news, at much higher prices.

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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 16 years of industry experience, 9 at Heartland.

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Past performance does not guarantee future results.

The Mid Cap Value Strategy invests in mid–sized companies on a value basis. Mid-sized securities generally are more volatile and less liquid than those of larger companies.

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.

As of 9/30/2018, Heartland Advisors on behalf of its clients held approximately 0.02%, 0.00%, 0.00%, and 0.00% of the total shares outstanding of Express Scripts Holding Co. (ESRX), UnitedHealthcare Corporation (UNH), Inc (AMZN), and Cigna Corporation (CI), respectively.

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