Heartland Advisors

Heartland Opportunistic Value Equity Strategy 1Q23 Portfolio Manager Commentary

Executive Summary

  • A speculative rally that began in January came to an end in March, amid growing fears of a banking crisis. 
  • Signs continue to point to a slowing economy and deteriorating fundamentals, and the financial sector’s woes will likely accelerate the cycle. 
  • An immediate outgrowth of recent bank failures is investors’ newfound appreciation for balance sheet strength and fundamentals. 
  • While conventional wisdom says to play defense, this could be a good environment to take a balanced approach.

First Quarter Market Discussion

At the start of the quarter, the mood of the market continued to alternate between euphoria over a potential Federal Reserve pivot and hand wringing over interest rates, inflation, and jobs — as was the case for much of the second half of 2022. Then in March came the collapse of Silicon Valley Bank, Signature Bank, and Silvergate Capital, and suddenly, the economy had a banking crisis on its hands. 

As financials make up the largest sector in most value indexes, it’s not surprising that value investors are paying particularly close attention to the health of banks. Are we surprised Silicon Valley Bank went from being the country’s 16th largest bank to non-existent in a matter of days? Absolutely. But was it unexpected that the financial health of certain banks would be called into question? Not at all. The lack of focus on both interest rate and credit risk following a prolonged period of artificially low rates set the stage for the Federal Reserve to “break something” following a 180-degree policy shift over the past year. 

The events over the past few weeks don’t change our big-picture views, but they do make us reassess earnings power potential and valuation targets for financial institutions who may experience a more onerous regulatory burden going forward. While we are underweight financials in general, we do have exposure to banks. But the businesses held in the strategy have high-quality funding bases and conservative credit underwriting standards. We aren’t playing defense, rather we favor fundamental traits such as financial soundness and sound business strategies as part of our 10 Principles of Value Investing™ that provide potential margins of safety. 

As part of our process, we also set four price targets for every security that we analyze — two for positive outcomes and two for negative scenarios. Those downside targets are particularly useful in challenging environments like this. Right now, signs continue to point to a slowing economy and deteriorating fundamentals, and recent troubles in the banking sector will likely only accelerate that. 

Ultimately, the banking crisis reinforces the advantage that active value investors have over passive strategies. At a time when balance sheet strength matters more than ever, it’s important to note that passive investments do not actively incorporate financial health considerations in portfolio construction. For us, financial health is integral to several of our 10 Principles of Value Investing™.

Attribution Analysis & Portfolio Activity

For the quarter, the strategy outperformed the Russell 3000® Value Index. While stock selection gave us an advantage in Industrials and Financials, we lagged in other areas including Communications and Health Care. For the past one, three, and five years, however, security selection has accounted for the vast majority of our performance.

Late last year, we had been buying shares of well-run small-cap businesses that we thought were positioned to be the leaders at the start of the next cycle. But after the “risk on” rally at the start of this year, which drove up prices throughout most cyclical areas of the market, mispricing opportunities were harder to come by, and this became less of a priority. As depicted in the following chart, small caps outperformed large caps by ~600bps through February only to lag by ~700bps in March.

Heartland Advisors Value Investing Small as % of Total US Equity Market
Source: FactSet Research Systems Inc., monthly data from 4/30/2003 to 3/31/2023. This chart represents Small Caps vs Large Caps against the ISM new order index. The ISM Manufacturing New Order Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The New Orders Index compares current month orders with the prior month. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.
We believe this is time for a more balanced approach, looking to take advantage of what the market gives us. For example, early in the quarter, we added to Utilities and Consumer Staples, which were largely left out of the speculative rally in January and February. We continue to see value in smaller businesses because the market is increasingly discounting an economic recession. For example, the Institute for Supply Management (ISM) Manufacturing New Orders Index (blue line) is a diffusion index that signals economic contraction below 50, a level it has hovered below since September 2022. Historically, investors have been rewarded for going down market when economic prospects are dim as they are today.

Consumer Staples. For example, we established a new position in Ingredion Inc. (INGR), a less than $7 billion market capitalization global food products company that converts corn, tapioca, potatoes, grains, fruits, and vegetables into ingredients and biomaterials used primarily in the food and beverage industries. Ingredion’s business has been under pressure in recent years for several reasons. First, high-fructose corn syrup has been in secular decline because of shifting dietary preferences toward natural sweeteners, and second, inflationary pressures have put downward pressure on margins largely due to a spike in agricultural commodity prices.

We’re attracted to several profit enhancement initiatives that, when combined with a customer-demand profile that is relatively inelastic and an attractive valuation, provide potential downside protection. The company’s self-help drivers include raising prices to offset previously realized inflationary headwinds and driving its high-margin specialty segment to a larger percentage of its overall sales. In addition, within the company’s lower growth ingredients segment, management is repurposing production capacity toward higher-value products.

INGR has historically traded at a 20-30% discount to its sector peers. Today, INGR trades at 7.9 times consensus EV/EBITDA over the next 12 months, which is around a 40% discount.

Industrials. We added a few cyclicals in the quarter that we believe can outperform regardless of which way the economy heads from here, including J.B. Hunt Transport Services (JBHT), a diversified shipping company with a focus on intermodal shipping. Customers hire Hunt, which operates an intermodal network twice the size of its next largest competitor, to move freight using different methods of transportation to reduce costs relative to alternatives. 

The freight market weakened meaningfully in 2022 following a robust recovery coming out of the COVID-19 pandemic. Because supply chains were a significant bottleneck for businesses over the past few years, management teams ordered “buffer inventory” to ensure product availability for internal consumption and for sale to customers. But in 2022, shippers recognized they had too much inventory as lead times improved across supply chains. In response, JBHT’s customers slashed orders, freight rates fell, and investors grew concerned about management’s decision to double the company’s intermodal fleet by the end of 2025.

We believe weakening freight demand, easing supply chain pressures, and railroad investments will cause customers to refocus on optimizing freight cost, which should benefit Hunt. The company is investing capital now on network expansion, and we believe the associated profits will come over time. The stock normally trades at parity or a slight premium to the industrial sector. But at 9.25 times consensus EV/EBITDA over the next 12 months, Hunt shares are at around a 20% discount to the company’s peers. 

J.B. Hunt operates with very little debt, and the management team has a track record of investing through economic downturns. Combining management’s history of strong capital allocation and a discounted valuation gives us confidence that Hunt can outperform through a recession and into an economic recovery, whenever that may happen.

Financials. While the broad financial sector sank in the quarter, Interactive Brokers (IBKR), a fully digital brokerage platform, gained 14.24% in the first three months of the year. 

Interactive Brokers’ differentiated business model shined because the company’s management team built the business to avoid the two risks that came to the forefront for sector peers this quarter, credit and interest-rate risk. IBKR is a prime example of why analyzing businesses under multiple scenarios, both good and bad, is so important. In late 2021, when we began purchasing IBKR, the market was not pricing credit or interest-rate risk into the sector. Banks appeared optically “cheap” on P/E multiples, but after adjusting for downside risks, the upside versus downside potential was far more compelling in Interactive Brokers than in banks. Today that gap has narrowed, however, we continue to hold a position in IBKR given its lack of credit risk, which has yet to be fully priced into many banks.

IBKR enjoys industry- and sector-leading pre-tax margins thanks to its highly automated platform that drives scale efficiencies, which are partially passed on to customers in the form of attractive interest rates on cash balances. For this reason, clients have little incentive to move deposits as interest rates rise. IBKR’s management team has refused to take duration risk thereby significantly lowering the chance of a “run on the bank” scenario that proved disastrous for several banks this year.   Credit risk is limited to securities-backed loans that are over-collateralized and marked to market in real time thereby significantly reducing any loss given default.


While the knee-jerk reaction to the budding banking crisis is to act defensively, we think this is a great backdrop for a balanced approach — one that considers both defensive and offensive opportunities, whichever is most attractive.

We understand that the near-term volatility caused by liquidity concerns isn’t fun. But we love a backdrop where we can find well-run businesses with sound management strategies, strong balance sheets, and robust cash flows that are being punished in the short run, with the understanding that these investments will be worth a lot more in the next few years. 

We thank you for your continued trust and confidence.

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Portfolio Management Team

Heartland Advisors Value Investing Portfolio Manager Troy McGlone

Troy McGlone

Vice President and Portfolio Manager

Heartland Advisors Value Investing Portfolio Manager Colin McWey

Colin McWey

Vice President and Portfolio Manager

Composite Returns*


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Since Inception (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD (%)QTD (%)
Opportunistic Value Equity Composite (Net of Advisory Fees)**9.658.687.6420.301.541.481.48
Opportunistic Value Equity Composite (Net of Bundled Fees)7.616.685.7918.430.111.131.13
Russell 3000® Value7.158.997.3018.12-6.350.910.91

Source: FactSet Research Systems Inc., Russell Investment Group, and Heartland Advisors, Inc.
*Yearly and quarterly returns are not annualized. The Strategy's inception date is 9/30/1999. 
**Shown as supplemental information. 

The US Dollar is the currency used to express performance. Returns are presented net of advisory fees and net of bundled fees and include the reinvestment of all income. The returns net of bundled fees were calculated by subtracting the highest applicable sponsor portion of the separately managed wrap account fee from the net of advisor fees return.

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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

Past performance does not guarantee future results.

The Opportunistic Value Equity Strategy seeks to capture long-term capital appreciation by investing in companies with market capitalizations greater than $500 million. The Strategy’s flexible pursuit of value positions it as a core holding for investors.

In addition to stocks of large companies, the Opportunistic Value Equity Strategy invests in stocks of small- and mid-cap companies that are generally less liquid than large companies. The performance of these holdings generally will increase the volatility of the strategy’s returns.

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

Heartland Advisors, Inc. (the “Firm”) claims compliance with the Global Investment Performance Standards (GIPS®). The Firm is a wholly owned subsidiary of Heartland Holdings, Inc. and is registered with the Securities and Exchange Commission. For a complete list and description of Heartland Advisors composites and/or a presentation that adheres to the GIPS® standards, contact Institutional Sales at Heartland Advisors, Inc. at the address listed below.

As of 3/31/2023,  Ingredion Inc. (INGR), Interactive Broker Group Inc. (IBKR), and J.B. Hunt (JBHT), represented 1.79%, 3.21%, and 1.46% of the Opportunistic Value Equity Composite’s net assets, respectively.

The future performance of any specific investment or strategy (including the investments discussed above) should not be assumed to be profitable or equal to past results. The performance of the holdings discussed above may have been the result of unique market circumstances that are no longer relevant. The holdings identified above do not represent all of the securities purchased, sold or recommended for the Advisor’s clients.

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

Statements regarding securities are not recommendations to buy or sell. 

GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

Separately managed accounts and related investment advisory services are provided by Heartland Advisors, Inc., a federally registered investment advisor. ALPS Distributors, Inc., is not affiliated with Heartland Advisors, 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.

In certain cases, dividends and earnings are reinvested.

CFA® is a registered trademark owned by the CFA Institute.

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.

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

Active Investing is an investment strategy involving ongoing buying and selling actions by the investor. Active investors purchase investments and continuously monitor their activity in order to exploit profitable conditions. Cyclical Stocks cover Basic Materials, Capital Goods, Communications, Consumer Cyclical, Energy, Financial, Technology, and Transportation which tend to react to a variety of market conditions that can send them up or down and often relate to business cycles. Defensive Stocks include Health Care, Utilities, and Consumer Staples. These companies usually don’t suffer as much in a market downturn as they relate to basic needs. 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). 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. Inflation Risk is the possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency. ISM Manufacturing New Order Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The New Orders Index compares current month orders with the prior month. Liquidity is the degree to which an asset or security can be bought or sold in the market without affecting the asset's price. It is characterized by a high level of trading activity. Assets that can be easily bought or sold are known as liquid assets. 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. 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 (P/E) 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. Risk on/Risk off Theory is an investment setting in which price behavior responds to, and is driven by, changes in investor risk tolerance. Risk-on risk-off refers to changes in investment activity in response to global economic patterns. During periods when risk is perceived as low, risk-on risk-off theory states that investors tend to engage in higher-risk investments. When risk is perceived as high, investors have the tendency to gravitate toward lower-risk investments. 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 Russell Investment Group. Russell 3000® Value Index measures the performance of those Russell 3000® Index 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. Selection Effect of the Attribution Analysis is the portion of the portfolio excess return attributable to choosing different securities within groups from the benchmark. 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.