Heartland Value Fund 1Q22 Portfolio Manager Commentary

Executive Summary

  • Major stock market indexes suffered their worst quarter in 2 years amid higher interest rates, war, and inflation fears. 
  • Nevertheless, we took advantage of the sell-off to add compelling values.
  • The market’s renewed focus on valuations, which started to cast a spotlight on attractively priced businesses last year, remains intact. 

Past performance is no guarantee of future results and investment returns and principal value of the Fund will fluctuate so that shares, when redeemed, may be worth more or less than the original cost. Current performance may be higher or lower than the performance quoted. Call 800-432-7856 or visit heartlandadvisors.com for current month end performance.

“Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance.”

—Warren Buffett

While there are no such things as moral victories in investing, value investors can at least take solace in the fact that the shift in the markets that started to take place last year — investors paying attention to attractively valued, profitable, well-managed businesses — remains intact.

To be sure, during the first quarter rout, small cap value fell modestly amid growing anxieties over rising inflation and interest rates along with the first major land war in Europe since World War II. Yet small cap value’s first quarter setback paled in comparison to small growth, which suffered losses five times greater.

This may be cold comfort to investors who live in the real world, where paper losses still compound. Nevertheless, value-minded investors know the importance of not letting short-term gloom and doom get in the way of one’s long-term strategy. As Warren Buffet famously said: “The most common cause of low prices is pessimism… We want to do business in such an environment, not because we like pessimism but because we like the prices it produces.”

Newfound Focus on Small Value

With economic and geo-political uncertainties swirling, we believe investors are now more mindful of the price they pay for the companies they own, which had been largely ignored for years when interest rates were at record lows. This renewed focus on valuations has shifted the market’s attention from large caps to small caps.

As demonstrated in the chart below, on a Price-to-Earnings (PE) basis small cap stocks remain “on sale” in relation to large caps.

This is only the third time in the last 42 years small caps have sold at this large of a discount and in our view validates our enthusiasm for the asset class.

A Pivot Towards Small Caps?

Heartland Advisors Value Investing Russell 1000 P/S Less Russell 2000 P/S Chart

Source: : ©2022 The Leuthold Group, 1/1/1983 to 3/31/2022. The Leuthold 3000 Universe is defined as the largest 3,000 securities traded on U.S. exchanges. Universe was segregated into large- and small-cap tiers. Blue bars identify recessionary periods of July 1990 to March 1991, March 2001 to November 2001, and December 2007 to June 2009. Price/Earnings Ratio (P/E). Past performance does not guarantee future results. There is no guarantee that a particular investment strategy will be successful.

Importantly within small caps, value seems to be at a decided advantage over small-cap growth, which based on projected 2022 earnings, remains nearly as expensive as large-cap stocks.

Another tailwind for small value: The anxious economic backdrop and the market’s growing desire for downside mitigation has been leading investors to the Energy and Utilities sectors both of which are heavily weighted in the value index and your portfolio,

Value Fund Valuations

Heartland Advisors Value Investing Value Fund Valuations

Source: FactSet Research Systems Inc., Russell®, Standard & Poor’s, and Heartland Advisors, Inc., as of 3/31/2022. Price/Earnings and EV/EBITDA are calculated as weighted harmonic average. Certain security valuations and forward estimates are based on Heartland Advisors’ calculations. Certain outliers may be excluded. Economic predictions are based on estimates and are subject to change. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future returns.

The Case for Active Value

While it’s always a good sign when the markets are paying attention to valuations and risks, it’s important for investors to understand that not all value strategies will lead them to the market’s most undervalued opportunities. Case in point: passive exposure to value. For instance, roughly half of the Russell 2000® Value Index’s Health Care weighting is held in Biotech stocks. How this sub-industry is classified as value is a head scratcher.

In our case, we’re focused on businesses that have the potential to hold up better in a volatile, down-trending market, which wouldn’t generally include many Biotech names. And we are finding compelling values in areas of the market that either experienced a prolonged downturn — such as energy and mining stocks, which are also benefitting from inflation’s tailwind — or that were simply overlooked after the market’s bounce back from the initial COVID downturn. The following are just a few of the quality businesses held in the fund trading at compelling prices.

Taking stock of housing

Radian Group (RDN) was a positive contributor in the quarter as shares of this mortgage insurance provider rose nearly 5%. The stock was buoyed by a strong housing market and better than expected underwriting results.

At the onset of COVID, many investors were predicting that the pandemic would lead to large increases in underwriting losses & decreased volumes due to housing slowdown for Radian and other mortgage insurers. Instead, a strong housing market buoyed by low interest rates, better capitalized consumers, and Millennials entering first-time home buyer age led to increased volumes of mortgage insurance written. Rising home equity and government forbearance programs kept foreclosures low and resulted in better than expected underwriting results for Radian.

Despite the strong recent performance, the stock currently trades at 92% of book value and just 7X estimated 2022 earnings. This lowly valuation doesn’t reflect the potential of Radian’s high growth fintech title service business, which management is targeting at $650 million to $1 billion in revenues by 2025. Further, the business is currently generating excess cash which is being returned to shareholders in the form of buybacks and dividends. RDN repurchased 9% of shares outstanding, 17.8 million shares in 2021 for a total of $399 million, at an average price of $22.48. They recently announced a new $400 million share repurchase program and raised the dividend 12% for a 3.6% dividend yield.

Also, we have been long-time holders of Century Communities (CCS), a builder of low-cost single-family homes and condos. We have been impressed with their 20-year record of profitable growth which reached a record $4.2 billion in sales and $14.47 in EPS in 2021. However, due to an increase in mortgage rates and fears of a housing slow-down, Century was one of our worst contributors, down -34.5%. While rising rates will temper a hot housing market, we remain constructive on the first-time homeowners’ market and Century’s management team. Despite a five-year average revenue growth rate of 34% and net income growth rate of 59%, the stock trades at a discount to estimated book value and an absurd 3.7X earnings. We believe the sell-off is overdone, largely discounting a potential slowdown.

Cool valuation

Supply chain issues and inflation took their toll on a number of companies in the latter half of 2021 and the start of 2022. Americold Realty Trust (COLD) was one of them. Shares of the world’s second largest owner and operator of cold storage warehouses — which hold processed foods in temperature-controlled warehouses until they are ready to be shipped to grocery stores — came under pressure due to a sharp decline in occupancy, as its customers struggled to staff their own production lines. Meanwhile, labor costs spiked in 2021, as employers across the nation struggled to staff their own facilities. Still, cold storage warehouses are a critical link in the food supply chain, and the stock trades at a cap rate of around 6.5%, which is a measure of the rate of return based on expected income generation. To put this in perspective, REITs that exhibit meaningful barriers to entry — which Americold does — tend to trade at a 4% cap rate or lower. We believe a 5% cap rate is a fair multiple.

Americold is a defensive play, in that it does not require a strong economy to thrive. In fact, a weakening economy could be beneficial to the company by cooling the labor market and easing some margin pressures. COLD pays a 3% dividend and was added in the quarter, off approximately 30% from recent highs.

Positioned for defense — and opportunities

There are plenty of reasons to be cautious in this market. As value investors, however, we believe it comes down to individual security fundamentals and risk vs reward considerations.

For example, we took profits on an aircraft manufacturer with a seemingly stretched balance sheet and decline in outlook.

Those proceeds were added to BWX Technologies (BWXT), a specialty manufacturer of nuclear components and initiated a position in Aerojet Rocketdyne Holdings (AJRD), which manufactures systems for defense and space applications. These changes overweighted Aerospace and Defense, which is 1% of the Russell 2000® Value Index. However, we are more heavily skewed to the defensive side of the industry.

Keeping our Emotions in Check

By filtering out negative headlines and focusing on long-term opportunities that are trading at attractive short-term prices, Heartland’s 10 Principles of Value Investing™ aims to avoid paying heavy prices for meaningless reassurances. This disciplined, fundamental research approach may be the road less traveled, but we believe it’s the best way to achieve long-term capital appreciation.

Thank you for the trust you place in us to manage your capital.

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Portfolio Management Team

Will Nasgovitz

CEO and Portfolio Manager

Bill Nasgovitz

Chairman and Portfolio Manager

Fund Returns


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Since Inception (%)20-Year (%)15-Year (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD* (%)QTD* (%)
Investor Class
Institutional Class
Russell 2000® Value11.028.556.9110.548.5712.733.32-2.40-2.40
*Not annualized

Source: FactSet Research Systems Inc., Russell®, and Heartland Advisors, Inc.

The inception date for the Value Fund is 12/28/1984 for the investor class and 5/1/2008 for the institutional class.

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In the prospectus dated 5/1/2022, the Gross Fund Operating Expenses for the investor and institutional classes of the Value Fund are 1.04% and 0.92%, respectively. The Advisor has voluntarily agreed to waive fees and/or reimburse expenses with respect to the institutional class, to the extent necessary to maintain the institutional class’ “Net Annual Operating Expenses” at a ratio not to exceed 0.99% of average daily net assets. This voluntary waiver/ reimbursement may be discontinued at any time. Without such waivers and/or reimbursements, total returns may have been lower.

Past performance does not guarantee future results. Performance represents past performance; current returns may be lower or higher. Performance for institutional class shares prior to their initial offering is based on the performance of investor class shares. The investment return and principal value will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. All returns reflect reinvested dividends and capital gains distributions, but do not reflect the deduction of taxes that an investor would pay on distributions or redemptions. Subject to certain exceptions, shares of a Fund redeemed or exchanged within 10 days of purchase are subject to a 2% redemption fee. Performance does not reflect this fee, which if deducted would reduce an individual's return. To obtain performance through the most recent month end, call 800-432-7856 or visit heartlandadvisors.com.

An investor should consider the Funds’ investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information may be found in the Funds' prospectus. To obtain a prospectus, please call 800-432-7856 or visit heartlandadvisors.com. Please read the prospectus carefully before investing.

As of 3/31/2022, Aerojet Rocketdyne Holdings (AJRD), Americold Realty Trust (COLD), BWX Technologies (BWXT), Century Communities (CCS), and Radian Group (RDN) represented 1.08%, 1.92%, 1.11%, 2.51%, and 2.30% of the Value Fund’s net assets, respectively. 

Statements regarding securities are not recommendations to buy or sell.

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

The Value Fund primarily invests in small companies selected on a value basis. Such securities generally are more volatile and less liquid than those of larger companies.

Value investments are subject to the risk that their intrinsic value may not be recognized by the broad market.

The Value Fund seeks long-term capital appreciation through investing in small companies.

The above individuals are registered representatives of ALPS Distributors, Inc.

The Heartland Funds are distributed by ALPS Distributors, Inc.

The statements and opinions expressed in this article are those of the presenter(s). Any discussion of investments and investment strategies represents the presenters’ views as of the date created and are subject to change without notice. The opinions expressed are for general information only and are not intended to provide specific advice or recommendations for any individual. The specific securities discussed, which are intended to illustrate the advisor’s investment style, do not represent all of the securities purchased, sold, or recommended by the advisor for client accounts, and the reader should not assume that an investment in these securities was or would be profitable in the future. Certain security valuations and forward estimates are based on Heartland Advisors’ calculations. Any forecasts may not prove to be true. 

Economic predictions are based on estimates and are subject to change.

There is no guarantee that a particular investment strategy will be successful.

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Heartland Advisors defines market cap ranges by the following indices: micro-cap by the Russell Microcap®, small-cap by the Russell 2000®, mid-cap by the Russell Midcap®, large-cap by the Russell Top 200®.

Because of ongoing market volatility, performance may be subject to substantial short-term changes.

Dividends are not guaranteed and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.

There is no assurance that dividend-paying stocks will mitigate volatility.

Growth and value investing each have unique risks and potential for rewards and may not be suitable for all investors. A growth investing strategy emphasizes capital appreciation and typically carries a higher risk of loss and potential reward than a value investing strategy; a value investing strategy emphasizes investments in companies believed to be undervalued.

Small-cap and large-cap investment strategies each have their own unique risks and potential for rewards and may not be suitable for all investors. Small-cap investment strategies emphasize the significant growth potential of small companies, however, small-cap securities, are generally more volatile and less liquid than those of larger companies. Large-cap investment strategies emphasize the stability of large companies, however, large-cap securities are more susceptible to momentum investments and may quickly become overpriced or suffer losses.

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Data sourced from FactSet: Copyright 2022 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

Book Value is the sum of all of a company’s assets, minus its liabilities. Buyback is the repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Dividend Yield is a ratio that shows how much a company pays out in dividends each year relative to its share price. Earnings Per Share is the portion of a company’s profit allocated to each outstanding share of common stock. Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization (EV/EBITDA) Ratio is a financial indicator used to determine the value of a company and is calculated by dividing the entire economic value of the company (enterprise value) by its earnings before interest, taxes, depreciation, and amortization (EBITDA). Growth Rate represents the rate of growth of equity securities within the Fund’s portfolio and is not meant as a prediction of the funds future performance, income earned by the Fund, or distributions made by the Fund.  There can be no assurance that a company’s actual earnings growth rate will be consistent with the estimate. Passive Investing is an investment strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments with the intention of long-term appreciation and limited maintenance. Price/Earnings Ratio of a stock is calculated by dividing the current price of the stock by its trailing or its forward 12 months’ earnings per share. Real Rate of Return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. Real Estate Investment Trust (REIT) is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages. Russell 2000® Value Index measures the performance of those Russell 2000® companies with lower price/book ratios and lower forecasted growth characteristics. All indices are unmanaged. It is not possible to invest directly in an index. Russell 2000® Growth Index measures the performance of those Russell 2000® companies with higher price/book ratios and higher forecasted growth characteristics.  All indices are unmanaged. It is not possible to invest directly in an index. S&P 500 Index is an index of 500 U.S. stocks chosen for market size, liquidity and industry group representation and is a widely used U.S. equity benchmark. All indices are unmanaged. It is not possible to invest directly in an index. Volatility is a statistical measure of the dispersion of returns for a given security or market index which can either be measured by using the standard deviation or variance between returns from that same security or market index. Commonly, the higher the volatility, the riskier the security. 10 Principles of Value Investing™ consist of the following criteria for selecting securities: (1) catalyst for recognition; (2) low price in relation to earnings; (3) low price in relation to cash flow; (4) low price in relation to book value; (5) financial soundness; (6) positive earnings dynamics; (7) sound business strategy; (8) capable management and insider ownership; (9) value of company; and (10) positive technical analysis. 

Heartland’s investing glossary provides definitions for several terms used on this page.