Heartland Advisors

Heartland Value Fund 4Q22 Portfolio Manager Commentary

Executive Summary

  • Value continues to outperform Growth, with the Russell 2000 Growth Index down -26% while the Russell 2000 Value Index has returned -15%. 
  • The Fund continues to outperform the benchmark. 
  • Despite the short-term pains, this market is proving to be constructive for enterprising investors.
  • Selectivity remains key, as our Research Team remains focused on identifying companies with competitive advantages that are sufficiently undervalued. 

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.

“In the middle of difficulty lies opportunity.”

​​​​​​—Albert Einstein

What a wonderful time it is to be an enterprising value investor.

This might seem like an odd thing to say at the moment, when a quick glance of the markets reveals a considerable amount of carnage. Despite a bounce in the first half of the fourth quarter, the Nasdaq composite is still down more than 30% in 2022 while the S&P 500 has lost more than 18%. Consumer confidence remains lower than it was during the global financial crisis. And investors are similarly glum, with nearly $5 trillion sitting on the sidelines, weary of risk-taking. 

Yet as some of the smartest people in the world have pointed out, it’s in difficult times when opportunities present themselves. We believe that even in a bear market, there’s a bull emerging somewhere. If a recession is on the horizon, there are still companies with competitive advantages that set them apart. It is our job, as bottoms-up stock pickers, to use this environment to find well-run businesses with secular tailwinds, when they are sufficiently undervalued.  

Which brings us to another bit of good news: valuations and balance sheet strength appear to matter again.

This shouldn’t come as a surprise, especially now that the cost of money is no longer free, and finances are being stressed by the one-two punch of higher rates and a weaker economy. After aggressive Federal Reserve tightening throughout the year, the yield on the 1-year Treasury has shot up from 0.38% to 4.7%. Tough competition for lofty valuations and speculation. In this environment, value stocks generally outperform growth, and we expect this trend to continue. 

The likelihood of finding value seems greater in small caps than large companies. After an historic run for name-brand growth stocks in recent years, small-cap’s share of total market value remains lower today than in the dotcom era of the late 1990s, as demonstrated in the chart below.  

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

Source: Center for Research in Security Prices (CRSP®), The University of Chicago Booth School of Business; Jefferies, Monthly data 12/1/1930 to 11/30/2022. The data in this chart represents small cap’s percentage of the US equity market. Note: Small is represented by deciles 6-10 based on market cap. All indices are unmanaged. It is not possible to invest in an index. Past performance does not guarantee future results.

Attribution Analysis & Portfolio Activity

Throughout the year, we’ve been looking for a combination of lower earnings estimates and stock prices to improve the risk-return profile of companies on our “watch list.” Some of those opportunities presented themselves recently. It was bottoms-up selectivity — not top-down sector bets — that instigated those decisions. Security selection also drove our performance throughout 2022, particularly among Financials, Real Estate, Information Technology, and Industrials.

A good example of that selectivity was Aerojet Rocketdyne Holdings (AJRD), a producer of products for space, defense, and weapons systems. We purchased the stock this Spring, after AJRD shares tumbled following Lockheed Martin’s decision to terminate its agreement to acquire AJRD amid anti-trust challenges. That was around the time, though, that demand for Aerojet’s missile motors was rising amid Ukraine’s effort to defend itself against Russia. In late December, L3Harris Technologies agreed to purchase the company for $58 a share, 38% above our purchase price.   

Normally, success doesn’t materialize that quickly. Here are more traditional examples of our stock selection:  

Consumer Discretionary. It’s hard to think of a stiffer economic headwind than what the housing market has been facing. After starting the year at just over 3%, the average rate on a 30-year fixed mortgage jumped above 7% midway into the fourth quarter. Not surprisingly, sales of existing homes have fallen for 10 straight months and are down 35% year over year. 

Century Communities (CCS), a homebuilder based in Denver, Colorado, hasn’t been immune. Sell-side analysts now believe CCSs’ 2023 sales will fall to 2020 levels, which is 33% below what they expected at the start of 2022. The stock is down around 38% year to date. We believe this is an example of short-term fear providing an excellent opportunity for the patient long-term investor. CCS is trading at just 78% of book value, thus providing a margin of safety.

Meanwhile, we are constructive on the supply-demand prospects for CCS’s core product. Approximately 80% of CCS’s sales are made to entry-level buyers. Supply of starter homes is tight after nearly a decade of below-average building activity. At the same time, millennials are reaching their first-time homebuyer age and forming households, providing a long-term buoy for demand. 

Century’s management team has guided the company to more than 20 straight years of profitability. We think they should be able to successfully navigate a housing slowdown and close its discount to book value over time. 

Industrials. Shyft Group (SHYF) is a leader in specialty vehicles, including “last mile” delivery vans used in ecommerce. More than a year ago, the company announced plans to develop an electric parcel-delivery vehicle, investing $75 million at launch. Concern over the elevated operational risks and spending associated with the program weighed on the stock sending shares down almost 49% this year.

The company has unique growth opportunities, and we believe the EV expenditures will ultimately be money well spent, as it expands the addressable market and protect against competitive offerings. The business is priced at only 8.2X our estimate for Enterprise Value to EBITDA, substantially below its intrinsic worth.

Consumer Staples. A new addition to the portfolio last quarter was Primo Water (PRMW), one of the largest providers of multi-gallon bottled drinking water for consumers and businesses in North America and Europe. While water isn’t necessarily considered economically sensitive, investors have underappreciated the stock partially due to fears that the downturn could hurt sales since the alternative—tap water—is free. 

PRMW’s business model, which includes direct delivery, refills, exchanges, and the sale of in-home dispensers, should prove recession resistant and durable. The company benefits from concerns over the quality of tap water, given the aging municipal infrastructure and the phasing out of single-use plastic bottles. We felt comfortable initiating a position after the company raised its revenue and earnings guidance and the CEO aggressively purchased shares. Plus, the stock trades at just 8.7X EV/EBITDA, a significant discount to its peer group and true worth.  


More so than others, value investors seem to appreciate that opportunities can be found in difficult times. Over two decades ago, value came back into favor after a prolonged period of underperformance amid the bursting of the dotcom bubble. Back then, all the headlines focused on the carnage in the tech sector, yet there were pockets of strength led by small-cap value. 

Today feels a lot like 2000. While stocks are broadly in a bear market, we are encouraged by renewed interest in value investing and the opportunities we are identifying in the small-cap space. If that market taught investors anything, it was that patience is required to take advantage of these extended runs, including the discipline to stick with the strategy and allow it to unfold over time. The big mistake investors made back then was giving up too quickly on value shortly after the tech bubble burst and assuming, incorrectly, that beaten-down speculative stocks offered real bargains.

We believe patient investors will be rewarded for buying and holding financially sound, well-managed assets at low prices relative to their earnings, cash flows, and book values. In other words, real value investing, and not just ‘buying on the dips.’ These quality and valuation traits are core to Heartland’s 10 Principles of Value Investing™, which guide our investments irrespective of market conditions.  

Thank you for your continued trust and confidence.


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Portfolio Management Team

Heartland Advisors Value Investing Portfolio Manager Will Nasgovitz

Will Nasgovitz

CEO and Portfolio Manager

Heartland Advisors Value Investing Portfolio Manager Bill Nasgovitz

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* (%)
*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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©2023 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 5/1/2023, the Gross Fund Operating Expenses for the investor and institutional classes of the Value Fund are 1.09% and 0.98%, respectively.

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 12/30/2022, Aerojet Rocketdyne Holdings, Inc. (AJRD), Century Communities, Inc. (CCS), Primo Water Corp (PRMW), Shyft Group, Inc. (SHYF), represented 1.74%, 2.34%, 1.21%, and 1.94% 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.

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 2023 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

Bear Market occurs when the price of a group of securities is falling or is expected to fall. Bull Market occurs when the price of a group of securities is rising or is expected to rise. Book Value is the sum of all of a company’s assets, minus its liabilities. Bottom-up is an investment approach that de-emphasizes the significance of economic and market cycles. This approach focuses on the analysis of individual stocks and the investor focuses his or her attention on a specific company rather than on the industry in which that company operates or on the economy as a whole. Enterprise Value (EV) is the entire economic value of a company. 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). Insider Buying is the purchase of a company's stock by individual directors, executives or other employees. 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. Margin of Safety is a principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value. NASDAQ Composite Index is the market capitalization-weighted index of approximately 3,000 common equities listed on the NASDAQ stock exchange and includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. The Russell 2000® Growth and Value indices consist of stocks within the Russell 2000® index with respective value and growth characteristics as determined by Russell Investments. Sell-Side Analyst is an individual who typically works for a brokerage firm and evaluates companies for future earnings growth and other investment criteria. They sometimes place recommendations on stocks or other securities, typically phrased as "buy", "sell", or "hold." 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. Yield is the income return on an investment. 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.