2Q26 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, how would you describe the small cap value market in the second quarter?

Michael Warecki: Yeah, it's interesting times in terms of market dynamic. I think a lot of active managers have been frustrated by the narrowness in the market. I don't think that's unique to just small cap value. We're certainly seeing it in our universe, but we're not letting that prevent us from finding opportunities and using our 10 Principles of Value Investing™ to find opportunities to still keep up and even outperform. So we've been meeting with management teams, reviewing our watchlist names, and still finding a lot of attractive bottoms-up stock picks that, offer risk-reward characteristics that we think are compelling for investors in today's market and also over the next several years from the estimates that we put together.

Michael: The Russell 2000® Value for the quarter put up a huge return. And I think a lot of times the expectation is, especially since, the process lends itself to risk management, margins of safety, and thinking about downsides, I think it's common for folks to think that value managers are going to have a hard time keeping up, but you got a beat for the quarter.

What do you attribute it to?

Andy Fleming: Just continue to stick with our knitting here we had a really strong quarter and we had strength really across the board. You know our sector bands they actually you know force us to be in some sectors like IT. That allowed us to benefit from a quarter like this. We actually had a great quarter within IT and this isn't us chasing you know strong data center plays this is us having exposure in these companies for a long, long time. Companies that have great capital allocation policies, companies that pay dividends, companies that buy back stock. And we've been there for the long haul. And these were good companies to begin with. And they've been turbocharged because they have small end markets related to data centers that are now growing.

Michael: Mike, any thoughts on, I know you played a big role in research on the Tech side for the Strategy. What observations or comments might you have for the quarter?

Mike: Yeah, I think at one point in the quarter, the Semiconductor Index, the SOX, was up 100%. And you're seeing that broad base, not just in the larger cap names, but in the small cap names. But we're finding opportunities with names that don't necessarily have a lot of legacy data center exposure that are benefiting from the ecosystem.

So, finding names that trade at good valuations from a free cash flow perspective that also have accelerating growth. So we're participating with some of the upside in that ecosystem, but there's also more legacy electronic equipment type of exposures, too, that aren't just like pure plays into one type of trade dynamic that we saw during the quarter that are seeing broad-based growth. So, yeah, it's really using the 10 Principles and applying those effectively that helps us identify these opportunities. And yeah, with our sector bands, we've been able to maintain some exposure and balancing that with our risk management process. But we're finding more value characteristics here and some of the names that offer more attractive risk reward characteristics in the sector.

Michael: Great. I know there's a lot of talk in the marketplace about Tech and just all the dynamics at play. Where are you excited outside of Tech? 

Mike: Yeah, Industrials, even last quarter, was a very exciting sector. Can get overlooked by the returns that the IT sector did put up, but Industrials was still up over 20%. And that's an area where we think we're in the earlier stages of the cycle, whereas maybe some of these IT names, particularly in the semiconductor industry, might be later stages in their cycle. So, we've been doing a lot of work, new opportunities for the Industrial companies in the portfolio, and also been updating and refreshing the watchlist there. And we're really excited about what prospects that sector has to offer going forward.

Andy: Yeah, and we've really been finding opportunities across the board. You know, Mike highlighted Industrials, which is definitely a focal area for us. You know, we've also been finding a lot of opportunities in Financials, for example. You know, FirstCash was a strong performer this quarter. This has nothing to do with AI. It's the largest pawn operator worldwide. And, you know, as low-end consumers are struggling, they're using pawn more and more. And FirstCash was a strong beneficiary of that trend in the quarter in this year. And despite the run it's had, you know, it's up nicely on the year. It's trading at only 13 times EBIDTA using our 26 and 27 estimates. So we think there's further room to run there.

Mike: Yeah, and even though last quarter we highlighted how Industrials and the IT, sectors were up as much as they were, there's areas too where there's extremely attractive value characteristics that haven't yet seen a catalyst play out. And perhaps we're seeing the early days of that catalyst play out.

So, we talked about Century Communities being one of our holdings. When Berkshire acquired Taylor Morrison for 1.1 times book value, Century was trading at 0.6 times book value. And since that acquisition, it's actually been a very strong performer within the Strategy. And it's only increased its multiple by about a third, still trading at well below book value. So those are some of those opportunities where when we talk about what we're seeing in future years, that there's still a lot of meat on the bone.

Michael: How about like maybe the most contrarian view or the area of the market that just doesn't seem to have much interest?

Andy: That's a good question, Mike. I would say the least excitement right now is Financials. And, you know, we've unearthed what we think will be a couple gems, hopefully contributing to the performance through the rest of the year.

Michael: Excellent. And then how about Outlook? What do you think about the rest of the year? 

Andy: We're generally optimistic. And I think this is a function of, that we're seeing opportunities across different sectors. Yes, we have exposure to IT, but it's not our opportunities that isn't concentrated by any means in IT. We're seeing opportunities in Industrials, which Mike talked about, Financials, but also the other sectors as well.

Michael: Mike, any thoughts about what the rest of the year might look like? 

Mike: We're not sure exactly how it'll play out, but from a risk-reward perspective and applying our 10 Principles, we're finding very strong characteristics in some of the more rate-sensitive sectors and industries. So like we highlighted earlier in this conversation around CCS and an outsized move that it made off of very low expectations, it's not just in housing, for example, that we're finding that there's other areas, too, in other sectors and industries, even within Consumer Discretionary apart from CCS, that we think could have very strong, positive catalysts going forward.

Michael: Excellent. Thank you guys for the update. 

Andy: Thanks, Mike.