1Q26 Value Plus Commentary Podcast

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Michael Kops: Hello, everybody. Michael Kop's here from Heartland Advisors. I'm joined by Mike Warecki and Andy Fleming, Portfolio Managers for the Value Plus Strategy.

Guys, it was a wild quarter. How might you describe the small-cap value landscape for Q1?

Andy Fleming: Yeah, it was a bit of a roller coaster. We came out really strong, especially the first two months. And then with the Iran conflict, everything retracted a little bit, but we're still in a good spot.

Michael Warecki: Yeah, I mean, broadly speaking, once the war broke out initially, markets responded to oil prices and interest rate rises. And it was kind of interesting to see broader base to how correlated markets were on an inverse basis to the price of oil. And subsequently, we've seen the opposite effect with going from an 11% drawdown to back close to up 11% year-to-date for the index. 

Kops: You know, whenever we talk about the four price targets and the work that you guys do to analyze stocks on a range of outcomes, I've always understood that it's in times of volatility that it may be a nice reference point. How would you apply that for Q1?

Andy: Yeah, so what you're saying is completely accurate. This was a somewhat unique situation where prices had rallied quite a bit. So, when we look at our four price targets, we're kind of hovering in that zone of between our top two targets. Between our price target and intrinsic value. And what happened during the quarter, really towards the end of the quarter, is we had a little drawdown where the majority of stocks and the portfolio kind of dropped to kind of that price target slightly below, in between the price target and downside target. So, it wasn't where things dropped to their 10-year lows or anything like that. We just saw kind of stocks drop maybe 10 or 15% in a short period of time. So, they went from some being overpriced to more fairly priced to slight discounts.

Kops: And how was the fight between the watch list and the portfolio for the quarter?

Mike: Yeah there are opportunities that we found attractive just to do work on new ideas or ideas we have been monitoring in the watch list, but there wasn't like an outsized amount of turnover in the quarter by any means. It was more so taking a look at what we own what we know we like what has had good capital allocation, a key part of our screening and investment process, and trying to take what was given for stocks that we think were being overly punished so to speak in this type of environment based on what we studied in terms of what's occurred to their business model over past cycles.

Kops: Excellent. We picked up a bit of outperformance for the quarter.

The strategy was up 5.14% versus 4.96% for the benchmark. What would you attribute the performance to?

Andy: It was driven by selection and primarily driven by, you know, three sectors. It was primarily IT, Health Care, and Discretionary. And we can talk about some names later on, but it was really those three sectors. 

Kops: Well, why don't we do that? Is there a name you'd like to highlight in one of those sectors?

Mike: Yeah, in IT, Silicon Motion (SIMO) was a strong contributor for us in the quarter. The previous year, it hadn't kept up with some of the highest flyers that are exposed to AI. As the AI solutions for Silicon Motion are just starting to hit the P&L here in 2026.

But what was most encouraging to see is for their first quarter of guidance after they announced Q4, is they're actually taking a substantial amount of market share within their legacy products.

So these guys provide memory solutions to a lot of the large memory manufacturers. And those memory manufacturers are now focused more so high bandwidth memory solutions, leaving some of the legacy NAND solutions not something that they want to keep servicing. And that's where Silicon Motion is taking 10 to 20 points of share in some instances.

Kops: Excellent. How about in another sector? Any comments maybe in Financials?

Mike: Yeah, Financials was a very volatile sector for us during the quarter. We actually underperformed slightly versus the benchmark within Financials. So Stifel Financial (SF) is a stock that we hold within Financials.

The stock has recovered quite a bit from what its peak drawdown was in the quarter, but it's highly exposed to investment banking activity and with higher rates, there were market fears around what that was going to look like for the quarter, but it sounds like with the pre-release that that's tracking right on track. They're also exposed to just market levels with fee-based income that they collect within the wealth management business. So, although it was a detractor for us during the quarter it's rebounded quite nicely and that's another stock where we talked about taking what was given that perhaps there was an opportunity to add. 

Kops: Excellent. Andy, is there a name you'd like to cover? 

Andy: Yeah, so we talked about IT a little bit, which is an outperformer, Financials, and then the other sector where we did quite well was Discretionary. And Wyndham Hotels (WH) is a name. Think of kind of economy, lower-end hotels. This is where they play. And this is more of a licensing model. So this is not an asset-heavy play. It's actually the opposite. It's an asset light play, but they're going to benefit from increased stays in their portfolio of hotels.

And what we're seeing now is, you know, perhaps there's not as many, you know, international flights, but we're seeing a lot of domestic travel that's benefiting the Wyndham's of the world. And we think there's going to be a few catalysts coming up later this year.

So, a nice quarter for Wyndham, but we think the outlook's really strong as well. It's cheap trading at a discounted valuation relative to peers, but we think the outlook's quite strong there. As some of the higher end consumers maybe opt for lower end hotels and kind of their core low end consumer picks up travel quite a bit.

Kops: Excellent. How about outlook here? I mean, we've, it seems like you get an on again, off again news cycle. What's the outlook for Q2 and maybe the rest of the year at this point?

Andy: Yeah. So when we look at our portfolio, and as we've talked about in the past, we're not overly macro focused. What has Mike and I most excited about the portfolio going forward is the capital allocation and the signals coming from our companies.

At this point, nearly 90% of our companies in the portfolio have an active buyback, approximately 60% have been growing their dividend, and that should probably increase after Q1 reports and over a third have seen insider buying. So you put it all together, you put it all in the pot, you know, close to 70% of our holdings are hitting at least two out of these three signals that we focus on. So that in and of itself is what's given us a lot of confidence going forward. 

And that's another reason why, to Mike's point earlier, we didn't see a ton of turnover in the quarter. And the companies that we own are hitting a lot of the signals that we want. So that's given us confidence in the portfolio that we have going forward without having to make a lot of changes.

Kops: Excellent. Mike, any parting comments you'd like to make? 

Mike: Yeah, we wouldn't be surprised to see continued volatility. We don't know what's going to happen on the macro front. But when we do our bottoms-up work on a stock-by-stock basis, based on the outlooks that companies are providing, the capital allocation decisions that they're making, we're cautiously optimistic going forward.

Kops: Excellent. Thank you, guys. 

Andy: Thanks, Mike.