Not All Growth is Created Equal

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Heartland Advisors Value Investing Research Analyst Andrew Fleming

Andrew J. Fleming

Fleming, CFA, is Vice President and Portfolio Manager of the Value Plus Fund and its corresponding separately managed account strategy. He has 9 years of industry experience, 6 at Heartland.


While we are value managers, that doesn't mean that we dislike growth. What we dislike is low-calorie growth. 
What we mean by that is companies that are growing their top line but not growing operating income. 
Oftentimes we look at companies that have two very different business lines:
  • One is the legacy business. It’s usually a cash cow, but it's not growing.
  • And then they have another piece of business. That piece of business would generally garner a higher multiple in the public markets, and that piece business has a higher margin and is growing quickly. 
What we try to focus in on is companies that are nearing that inflection point: Where the high-growth business, high-margin business will start to be a greater percentage of operating income moving forward.
When we gauge whether or not company will be able to execute on its margin expansion story, what we’re really focused on is the management team there: Their approaches to capital allocation.
A great track record would be a plus, but oftentimes you have a new CEO who doesn't have prior public company experience. So in that situation, we really want to meet with the CEO and CFO of the company that we’re investing in.
And, you know, we just have to gauge whether or not we think they can execute.
So, a company that we own in our portfolio that’s undergoing a shrink to grow strategy is a company that manufactures electrical components that are used primarily in consumer products.
It was a saddled with a couple businesses that don't quite fit together—and saddled with a little more debt than we normally like to see in our holdings.
Recently management has decided to divest one of those non-core businesses. They’ll be using the proceeds to pay down debt. 
So as a result of this divestiture, we think the company will improve its focus, reduce leverage, increase margins, and hopefully poise the company for profitable growth going forward.

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