Scenario 4: A Transition Story

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


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Transcript 

FirstEnergy, ticker FE, is a classic example of a transition story in our portfolio.

Purchased at roughly 11x earnings, FE offered a valuation on a PE basis of approximately 1/2 to 2/3 of the comparable peer group of regulated Utilities.

The market did not like FirstEnergy's commodity merchant power generation business, which admittedly was very challenged in this day and age of low power prices.

We felt that FirstEnergy could transition into a purely regulated Utility. We also gained significant comfort that much of the debt associated with the commodity merchant business was non-recourse to the parent. What that means as FE equity shareholders is that was not our liability; we felt that debt was not going to translate into a liability that goes against our ownership in the company.

We have been proven right so far, with FirstEnergy providing significant clarity to the marketplace on their exit from merchant power and into a fully regulated Utility. That process is expected to conclude this year.

Despite the strong performance of the stock, we feel that FE still offers compelling value, trading at 15x earnings versus a relevant peer group that trades at 17x to 22x earnings. Yet, once again, we think FE has some of the best Utility regulated growth opportunities in the universe.

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Presenter

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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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.

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