Heartland Value Fund 4Q21 Portfolio Manager Commentary

Executive Summary

  • A renewed focus on price paid for businesses provided a tailwind for attractively valued businesses and the Fund beat its benchmark.
  • The past year gives us optimism that investors are gradually coming around to the importance of valuations.
  • We view the strong performance for small cap value stocks as the beginning of what could be a long rewarding trend. 

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.

“Mr. Market's job is to provide you with prices; 
your job is to decide whether it is to your advantage to act on them.”

​​​​​​—Benjamin Graham

After years of Mr. Market seeming to have free rein to name any price he wanted, 2021 saw signs that investors were starting to say enough. Performance for the small-cap value index ended the year on equal footing with returns posted by the S&P 500 and roughly 10X the return for the small-cap growth index. The emerging trend provided a tailwind for attractively valued businesses and the Fund beat its benchmark during the fourth quarter. 

Following years of small growth outpacing value in a low interest rate, low inflation era, as shown below, we view the strong performance for small cap value as the beginning of what could be a long rewarding trend for investors. 

More to Come?

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

Source: : FactSet Research Systems Inc., Monthly data 1/1/2002 to 1/6/2022.  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. Past performance does not guarantee future results.

As value investors, we cheered this budding return of reason but recognize not all investors have abandoned their spendthrift ways. Whether its sales of Manhattan’s luxury homes clocking in at 30% higher than the previous highwater mark in 2015 or investment bankers bringing a record volume of $1 billion-plus initial public offerings to market, some are still clinging to a “price is no object” mentality. 

For equities, the result has been a sliver of stocks driving returns of broad indices. For instance, just five companies accounted for over 60% of the gains in the tech-heavy Nasdaq 100 Index for the year. The byproduct of investors chasing the largest names has resulted in top-heavy indices, as shown below, where a handful of names can make or break performance for passive investors.

Tail Wagging the Dog

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

Source: S&P Dow Jones  ndices and Ned Davis Research, Monthly data from 01/31/1972 to 12/31/2021. Copyright 2021 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. All indices are unmanaged. It is not possible to invest directly in an index. The S&P provides an indication of broad market performance but is not a benchmark of the Funds. Past performance does not guarantee future results.

In response to this backdrop, we continue to focus our relentless research on identifying and owning companies that are poised to succeed against a variety of backdrops or those that are priced at significant discounts to peers regardless of the sector. 

Proof of our dedicated approach is reflected in the chart below displaying the extreme valuation discount of the Fund compared to the major indices. We believe the 11 portfolio holdings snapped up this year at premiums by strategic buyers highlights that others also recognize the attractiveness of a value-driven approach. 

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 12/31/2021. 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.

A Strong Finish

A renewed interest in the price paid for businesses was a boon for many of the names held in the portfolio. As we look froward to what the New Year has to bring, here are a few of the companies in the Fund that we view as overlooked gems ripe for discovery by investors.

Take it to the Bank

The portfolio’s Financials holdings have been a source of strength throughout 2021. While shares of large national banks cooled late in the year on concerns that loan losses could inch higher, we continue to find well run regional players that are thriving by serving unique niches. Capital City Bank Group, Inc. (CCBG), is a prime example of our approach.

The bank serves the booming state of Florida and fast-growing Southeastern U.S. through its 57 branches. We’ve been long-term investors in Capital City, attracted by its unique position as one of the largest publicly traded financial holding institutions headquartered in Florida, conservative long-term capital allocation strategy, and significant insider ownership.

Capital City has made the most of population increases as reflected by its five-year compounded 35% annual growth rate. Additionally, management has been able to produce a 9.5% return on equity, outpacing the roughly 7% rate of regional banks on average. 

Despite its high-growth footprint and strong management, shares of Capital City are priced at a nearly 10% discount to competitors.

COVID Complications

Shares of many Health Care companies were down as the continuing threat of COVID-19 dampened demand for elective medical procedures and health care providers struggled to maintain adequate staffing in the face of burnout and resistance to vaccine mandates. The Fund’s holdings performed in line on a relative basis but detracted from absolute results.

Instead of trading on every new wrinkle in the ongoing pandemic, we’ve taken the long view by focusing on owning businesses that we believe are well positioned to drive consistent growth when the shadow of COVID-19 fades. 

Perrigo Company PLC (PRGO), a pharmaceutical business and leading maker of private-label over-the-counter products, is one such opportunity. While the company is lumped in with more volatile pharma companies, we view it as a consumer-packaged goods business that offers a one-of-a-kind product platform characterized by a stable, growing, and valuable cash flow stream.

A new management team with a strong track record was hired in late 2018 to rectify stumbles made by previous leadership. We’ve been pleased with the strides taken and believe recent supply chain issues and reduced demand for its cold and cough products are directly related to COVID-19 and are, therefore, temporary. With shares trading at close to stated book value and 13X next year’s estimated earnings before interest, taxes, depreciation, and amortization (EBITDA), the team views Perrigo as a compelling opportunity for the quarters to come.

Masked Success

Information Technology (IT) had a strong showing for the period, and the portfolio reaped rewards from some long-time holdings, including Photronics Inc. (PLAB).

Photronics is an industry leading, global manufacturer of photomasks used to transfer circuit patterns onto semiconductor wafers and flat panel displays. During the past year, the company has met the challenge of heightened demand despite facing supply-chain bottlenecks. 

Investments made a few years ago to spur growth are beginning to produce results with dramatic improvement on return on equity (ROE)—which we expect to reach 9% this coming year. Despite the strong growth, shares trade at just 1.2X book value and 13X next year’s estimated earnings. 

Shares are up handsomely since we initially took a stake in the business, and we’ve taken some profits to redeploy elsewhere.

Hidden Energy

Uncertainty about economic growth in the coming quarters weighed on Energy companies in the broader market. Longer term, we believe the capital discipline oil producers have shown over the past few years will provide support for energy prices as increased incremental demand will continue to absorb modest production increases. The Fund’s holdings in the sector fared better, and the portfolio owns well managed producers with strong balance sheets. Longtime holding Berry Corporation (BRY) fits this profile.

We highlighted Berry in the third quarter commentary praising its seasoned management team and financial strength. The company maintained its record of shareholder-friendly policies during the most recent quarter.

The move, along with compelling valuations—shares trade at just 4.7X EV/EBITDA—makes Berry, in our view, an attractive opportunity. Management remains disciplined 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.

To a Brighter 2022

For too long, small-cap value stocks have taken a back seat to growthy darlings in the market. Yet the past year gives us optimism that investors are gradually coming around to the importance of valuations. While we would welcome a quicker return to rationality, we recognize that after roughly a dozen years of growth outperforming value it will take time to unwind some of the excesses found in the market today. 

In the meantime, we will continue to adhere to our process that has led us to winners in a variety of industries. While the catalysts for the portfolio’s top performers in 2021 have varied, they shared the common trait of valuations that we found far more compelling than the multiples paid by momentum investors for a handful of glamour stocks large or small.

We acknowledge this fundamental approach isn’t always sexy but view it as the best way to achieve the long-term goal of capital appreciation. 

Thank you for your continued confidence. 

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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® Value11.179.187.1912.039.0717.9928.2728.274.36
*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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©2022 Heartland Advisors | 790 N. Water Street, Suite 1200, Milwaukee, WI 53202 | Business Office: 414-347-7777 | Financial Professionals: 888-505-5180 | Individual Investors: 800-432-7856

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 12/31/2021, Berry Corporation (BRY), Capital City Bank Group, Inc. (CCBG), Photronics, Inc. (PLAB), and Perrigo Co. PLC (PRGO) represented 1.38%, 1.75%, 1.88%, and 1.42% 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.

Sector and Industry classifications are sourced from GICS®.The Global Industry Classification Standard (GICS®) is the exclusive intellectual property of MSCI Inc. (MSCI) and S&P Global Market Intelligence (“S&P”).  Neither MSCI, S&P, their affiliates, nor any of their third party providers (“GICS Parties”) makes any representations or warranties, express or implied, with respect to GICS or the results to be obtained by the use thereof, and expressly disclaim all warranties, including warranties of accuracy, completeness, merchantability and fitness for a particular purpose.  The GICS Parties shall not have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of such damages.

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.

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Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indices. Russell® is a trademark of the Frank Russell Investment Group.

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

Absolute Value is a business valuation method that uses discounted cash flow analysis to determine a company's financial worth. Absolute value models try to determine a company's intrinsic worth based on its projected cash flows. Book Value is the sum of all of a company’s assets, minus its liabilities. 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. 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. Inflation Risk is the possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency. NASDAQ 100 Index includes 100 of the largest domestic and international non-financial companies listed on the NASDAQ Stock Market based on market capitalization. All indices are unmanaged. It is not possible to invest directly in an index. 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. Relative Value is a method of determining an asset's value that takes into account the value of similar assets. Calculations that are used to measure the relative value of stocks include the enterprise ratio and price-to-earnings ratio. Return on Equity is a measure of the net income after taxes that a firm is able to earn as a percent of stockholders equity. 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. Russell 2000® Value Index measures the performance of those Russell 2000® companies with lower price/book ratios and lower forecasted growth characteristics. 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.

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