4Q25 Value Plus Commentary Podcast

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

Guys, when you look at small cap value for the last quarter, what's your big picture take?

Andy: I'd start, I’d say we are starting to get some traction and the stocks are starting to finally show some positive momentum, boosted by strong earnings.

Mike: Yeah, I mean, it seems like there's signs of improvement across, now a wider variety of sectors and industries. And we haven't seen that for quite some time with small value not having kept up with large cap stocks. But we are seeing signs of some early cycle rotation and improvement and that gives us a lot of encouragement going forward for what perhaps is more to come in 2026.

Kops: Yeah, that's kind of my next question is, did the Q4 give you greater confidence going forward or anxiety or just how are you feeling in the moment?

Andy: Giving us greater confidence.

We're just seeing the breath improve. We're starting to see catalysts play out. We're starting to see demand slowly but surely pick up. So, more confidence as we move into 2026. 

Mike: Yeah, for our strategy, we're very focused on capital allocation. And over the last 12 months, we've been seeing more open market purchases from insiders, more aggressive buybacks from the board of directors at the company level. And we've been waiting for that guidance, that improved guidance to really come forward. And we've seen it in some cases, but it does seem like throughout the fourth quarter that it's becoming more widespread. And that's definitely encouraging.

Kops: So the strategy trailed a little bit in the fourth quarter. What do you attribute it to?

Andy: Primarily our lack of exposure to Biotechs. Biotechs were up over 25% in the fourth quarter, and we didn't own any. This is because they're generally not profitable and don't fit our process. The good news is we are seeing green shoots in other areas of Health Care. We've actually increased our exposure to Health Care, and we expect that to benefit us in 2026.

Mike: Yeah, Biotechs were up 25% in the quarter. And unfortunately, we weren't able to keep up within that industry. But we did have other stocks in other sectors and industries that had very strong results during the fourth quarter.

Kops: So what's the hang up? I mean, this is not uncommon that Biotechs are kind of the bane of small cap value managers' existence. What's to, what’s the gating issues to prevent you from going there?

Andy: They don't fit our process primarily because most of them are unprofitable. Most of them are money losing most of them don't have great balance sheets so really, it's really a bet on how a drug will do in clinicals and it's just not a investment we're willing to make.

Mike: Yeah there's a lot of concentrated risk that comes along with making an investment in your typical Biotech company and that can be big risk big reward not necessarily a identifiable margin and a safety that we look for with our style of investing. That doesn't mean that we can't participate though, because there are other stocks that serve the industry as a whole that have less concentrated risks, but still can participate in some of that industry upside as that cycle progresses.

Kops: Excellent, yeah, thank you for that. So more broadly, maybe you could give us a little color on a stock for the quarter that either was difficult or a winner, dealer's choice.

Andy: Sure. So Real Estate is an area where we outperformed. And one of the big contributors there was Lamar. It's a holding we've had for a long time, the leading outdoor advertiser. And it's kind of languished in 2025. But in the third quarter, the reported third quarter, which happened during the fourth quarter, they gave a very positive guide for 2026 and they talk about pacings which is equivalent to backlog for other companies. And pacings are going up quite a bit which is good to see and they haven't yet received any pacings or orders for the political ads which will be coming in 2026 so you've got a couple nice kind of demand drivers there for Lamar as we head into 2026. 

Kops: Pretty unique way to play REITs, 

Andy: It is, and it hits two of our big three as well. It's got a dividend, which it grew in 2025, and they had an active buyback in the year, which is somewhat rare for REITs.

Kops: I know this is another area where oftentimes value investors get hung up, but I think it's a good example of how if you're going to put some constraints on the portfolio and say we want to have exposure for portfolio construction and mitigating portfolio risk, you have to get creative sometimes. Lamar's a pretty good example, I think. Interesting. 

Okay, so any other stocks you want to talk about, maybe highlight?

Mike: Yeah, there's another stock that showed some positive signs from an improvement perspective in the fourth quarter. We actually added it early in the fourth quarter. That's Wesco International. So, they're an Industrial distributor. They're mostly levered to the Utility broadband and Communications end markets. They have some general Industrial exposure as well. But they reported what has been for the first time in, at least a few quarters, positive results. They reported their third quarter of 2025. But it's a stock where we've had a thesis. A lot of it's been cyclically driven in terms of the underperformance that's been tied to their utility and broadband segments.

But we're starting to see those now bounce back with just better conviction from the management teams of their customers investing into those end markets. And there's a lot of margin improvement opportunity for that stock. They've put in a large repurchase program and they've been active with that. But we expect that EBITDA margins can expand quite significantly and drive double-digit earnings growth on what's a more modest top-line growth rate at a mid-single-digit percentage.

Kops: Excellent. Mike, you commented earlier about optimism for 2026. So what's the outlook?

Mike: Yeah I don't really think our outlook is different than consensus we don't really pride ourselves in being top-down investors by any means we're very bottoms-up focused but we when we take a look at the portfolio and the prospect, prospects, for 2026 on a bottoms-up basis, we have very reasonable valuations which is hard to find in this market for our portfolio and I think that's more so levered to small caps in general on a relative basis at this point in time. If you take a look at where they're trading relative to large caps at least. And we do see prospects for mid-teens earnings growth on what's a modest multiple going forward so TBD what happens on the macro front from a catalyst perspective with interest rates obviously being a big one for the equity markets but just that earnings growth alone even without multiple expansion from here can deliver really positive results for our shareholders going forward.

Kops: Andy, any thoughts just on the outlook for the year?

Andy: Yeah, we're optimistic. I'll give you an example, a kind of microcosm. It's Builders FirstSource. It was a big detractor in the fourth quarter, but it's the type of name that we're excited about as we head into 2026.

There are some negative data points on housing throughout the year, most notably higher interest rates, but something really jumped out to us. The founder of the company bought $55 million worth of stock in the in the second half of the year. This is one of the largest purchases I’ve seen during my investment career, and this immediately caught our attention. So he bought stock around $111, the stock languished throughout the year waiting for interest rates to perhaps dip down and we think that stock will be a big performer. In addition to that it hits two of our big three the insider buy, which we just talked about, as well as an active buy back. 

Kops: Excellent. Any other thoughts or points you want to make before we wrap it up?

Andy: I think that does it. 

Kops: Great. Thanks, guys.