Heartland Value Fund 3Q21 Portfolio Manager Commentary

Executive Summary

  • The inflating bubble in many asset classes drained oxygen away from value stocks. 
  • By seeking to avoid stratospheric valuations and employing our disciplined research process, we hope to capitalize on current price distortions. 
  • Investors showed signs late in the quarter that they were looking at valuations before throwing more money at some of the latest and greatest.

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.

“Whenever you find yourself on the side of the majority, it is time to pause and reflect.”

​​​​​​—Mark Twain

Maybe the brief selloff late in September was a sign of the “pause and reflect” that Mr. Twain advised. We think so. After 18 months of nearly uninterrupted gains in everything from large growth stocks to cryptocurrencies, investors seem to be stepping back and looking at valuations before throwing more money at some of the latest and greatest. What they are seeing can be summed up with one simple metric—the Buffett indicator. 

Named after Warren Buffett, the measure looks at the market value of virtually all publicly traded U.S. businesses relative to the U.S. gross domestic product. Recent readings peg the indicator at 240%. In another way, investors are paying roughly $2.40 for every $1.00 of goods produced. That is almost twice the long-time average, and the highest level in the past 70 years.

In stark contrast to the above highlighted valuations, we are sticking to our value-focused process by buying businesses, in most cases, at a fraction of sales per share and well below our estimate of intrinsic worth. 

The proof is displayed in the chart below that shows the disparity in valuations between holdings in the portfolio and those in the major indices. We believe paying a low price to earnings and cashflow, coupled with a strong balance sheet, positions the portfolio to capitalize on what could be renewed interest in common sense value.

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 9/30/2021. 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.

Air Pocket

The inflating bubble in many asset classes early in the quarter drained oxygen away from value stocks and the Fund was off modestly, but kept pace with its benchmark. We believe the setback is temporary and your holdings should be in a stronger position for the long haul than many of the market darlings of today. 

The following are just a few of the quality businesses trading at compelling prices that are held in the Fund.

Keep on Trucking

As the economic recovery continues to progress, some stores are finding it hard to keep shelves stocked thanks in part to bottlenecks in shipping. Those backlogs are resulting in record low inventories when measured against sales, as shown in the following chart.

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

Source: Furey Research Partners, FactSet and US Bureau of Economic Analysis. Chart depicts quarterly data from 1958 to 2021 and expresses the ratio of U.S. Private Inventories to Domestic Business Final Sales, seasonally adjusted. 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 results.

As the global economy continues to work through kinks in the supply chain that emerged during the pandemic, commercial trucking companies such as Covenant Logistics Group Inc. (CVLG) should thrive.

Covenant Logistics provides shipping services for both dedicated routes and one-off deliveries. The company has benefited from increased demand in a tight shipping market. Management has also undertaken an aggressive plan to raise profit levels through the sale of its low-margin refrigerated delivery fleet, which should deemphasize its volatile spot in the shipping business. 

Although share have appreciated, they remain attractive trading at 8X earnings and 4X enterprise value to earnings before interest, taxes, depreciation and amortization (EV/EBITDA). With shares priced just 70% of our estimates of intrinsic value, we believe investors should be well compensated in the quarters ahead, as the company completes its transformation to a high margin freight hauler.

Cash to Spend

After spending most of the past year betting on the resiliency of consumers, investors began to lose faith as enhanced unemployment benefits and government stimulus checks wound down and inflation remained elevated. A closer look at the data as shown in the chart below, however, indicates the downturn in consumer economic health may be overstated. It shows that financial obligations such as rent and loan payments, as a percent of disposable income, have shrunk to the lowest level in 40-plus years. 

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

Source: Furey Research Partners & FactSet.  Chart depicts annual data from 1980 to 2021 and expresses the household financial obligations as a percent of disposable income. 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 results.

More money in consumers’ pockets could benefit portfolio holding Bed Bath & Beyond Inc. (BBBY), a national retailer of home goods. 

We highlighted Bed Bath in our commentary last quarter and praised its new management team led by CEO Mark Tritton, who came to the company after a successful tenure at Target. Leadership has been closing underperforming stores, selling non-core businesses to firm up the balance sheet, and implementing retail best practices across the company. 

The efforts hit a snag in the most recent quarter due to supply chain disruptions, a spike in COVID-19 cases, and persistent inflation pressures. The headwinds took a toll on earnings with the company reporting weaker-than-expected results and subdued guidance in late September.

The recent setback was disappointing; however, we view the initial reaction from investors as overblown. The challenges experienced during the period are likely temporary and we remain confident in Bed Bath’s trajectory going forward. With shares trading at less than 5X EBITDA, BBBY could offer investors meaningful compensation for their patience in the quarters ahead.

Renewed Energy?

Uncertainty about near-term oil prices sent Energy companies tumbling early in the period, but signs of a rebound took shape late in the quarter. We continue to take a cautious approach in the sector and are placing an emphasis on proven management teams and balance sheet strength. Longtime holding Berry Corporation (BRY) is an example of our thinking.

The company is a seasoned oil and gas producer with a solid balance sheet and a shareholder-friendly management team. Berry boosted its dividend 50% earlier this year and has been actively repurchasing shares during the quarter. Additionally, the company has been using free cash flow to  opportunistically retire debt.

We’ve recently been trimming Berry on strength to manage the portfolio’s exposure. However, the moves detailed above, combined with compelling valuations—shares trade at just 4.5X next year’s estimated earnings and 3X EV/EBITDA—make Berry, in our view, an attractive opportunity. Management continues to demonstrate discipline in allocating capital, reining in debt, and focusing on high-margin production. This approach, along with aggressive efforts to return capital to shareholders through share repurchases and increased dividends, should attract additional investor interest.

Upon further reflection

The market distortions that have prevailed for much of 2021 have been a source of near-term frustration. It is hard to watch as well-run, industry-leading small businesses languish while shares of priced-for-perfection growth companies, IPOs, and digital art images continue to climb. However, effective investing requires a horizon that stretches beyond bouts of market mania. By seeking to avoid stratospheric valuations and employing our disciplined research process, we hope to capitalize on current price distortions by purchasing high-quality businesses that should thrive well into the future.

Over the past four decades, we’ve found that when small cap valuations are depressed, the asset class is unloved, discerning investors willing to follow Mr. Twain’s advice to pause and reflect can reap the long-term benefits that come from a contrarian value-driven focus.

Thank you for allowing us to manage your capital. 

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Portfolio Management Team

Bill Nasgovitz

Chairman and Portfolio Manager

Will Nasgovitz

CEO 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® Value11.129.797.5013.2211.038.5863.9222.92-2.98
*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 9/30/2021, Bed Bath & Beyond, Inc., Berry Corp., and Covenant Logistics Group, Inc. Class A represented 0.95%, 1.69%, and 1.24% 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.

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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. 

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

Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) measures a company’s financial performance. It is used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. Free Cash Flow is the amount of cash a company has after expenses, debt service, capital expenditures, and dividends. The higher the free cash flow, the stronger the company’s balance sheet. Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. Intrinsic Value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Sales Per share is a ratio that computes the total revenue earned per share over a 12-month period. 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.

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