Heartland Opportunistic Value Equity Strategy 2Q22 Portfolio Manager Commentary

Executive Summary

  • Investors went to “risk off” mode in the quarter, as large-, mid-, and small-cap stocks all fell into a bear market.
  • The market seems to be rapidly pricing a recession into many early-cycle cyclical stocks that have been severely punished.
  • While we expect the selling and volatility to continue, we are also looking for opportunities to move into “wish list” stocks that until recently were too expensive to consider.

Second Quarter Market Discussion

Investors entered the quarter in a decidedly defensive mood, waiting for some of the uncertainties weighing on the markets to make themselves known. Would consumer prices continue to climb? Would the Federal Reserve have to raise rates faster than expected to slow the pace of inflation? And could those rate hikes potentially push the economy into a recession? By the end of the quarter, the answers to many of those questions came into sharper focus as large-, mid-, and small-cap stocks all officially fell into a bear market.

But while the market’s mood turned even more cautious by quarter’s end — against the backdrop of a weakening Retail sector, sinking consumer confidence, and the bursting of the speculative bubble in cryptocurrencies and high-multiple stocks — potential opportunities created by the downturn for long-term investors are also starting to become available.

To be sure, we don’t know when the bear market will end. Nor is it possible to predict, with any certainty, how long a potential recession might last, especially given that this is the first downturn in more than three decades unfolding while the Fed is having to fight inflation. We believe it is likely that there is more selling and volatility ahead, as the pain felt in the equity markets thus far has largely been driven by multiple compression. Stock prices could continue to be pressured in the coming months, as analyst estimates, which still seem far too optimistic, are finally ratcheting lower and as more companies reset their earnings and revenue guidance amid recession fears. 

As the resetting of expectations continues, we are taking an attentive, wait-and-see stance because high quality cyclicals that will likely lead the market out of a downturn are rapidly moving from fair to undervalued. We believe lower expectations will set the stage for cyclical leadership after an economic recession is officially declared.    

More Room to Fail?
Heartland Advisors Value Investing Personal Income vs. Retail Sales Chart
Source: FactSet Research Systems Inc., Monthly data 6/30/1997 to 5/31/2022. The data in this chart represents the Real Retail Sales Growth (seasonally adjusted) versus the S&P 500 Earnings Growth starting in May of 1997. The Real and Food Sales Growth index has a base of 1982-84=100 (the average of the monthly index values is 100 over the 36 months in 1982 through 1984). All indices are unmanaged. It is not possible to invest in an index. Past performance does not guarantee future results. 

Attribution Analysis

At least one good thing has come about as a result of this downturn: the market has confirmed the important shift that we saw take place at the end of last year, as investors appear much more mindful of fundamentals such as earnings growth and valuations than they’d been in prior years. In the second quarter, for example, value beat growth across all cap sizes, which makes sense because earnings growth for value stocks has actually exceeded that of growth companies and the broad indexes over the past two years. 

Still, value-oriented businesses won’t be immune from a recession. All we know is that well-financed businesses that consistently generate strong free cash flow will inevitably rebound to the benefit of patient long-term investors. We also know that security selection matters now more than ever. In fact, security selection has been the primary driver of our performance over time, and the same was true for this quarter, when our Strategy outperformed the Russell 3000 Value Index in nine out of 11 sectors, led by Real Estate, Financials, and Energy.  

Heartland Advisors Value Investing Financial Sector IconReal Estate. While Real Estate is generally thought of as an economically sensitive sector, our exposure to the group has a defensive and high-quality bias. This was reflected in the positive performance of our Real Estate holdings in the quarter. 

As an example, Americold Realty Trust (COLD), the second largest owner and operator of cold storage warehouses in the world and a critical link in the food production supply chain, is a defensive play as 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. 

Earlier in the year, COLD shares came under pressure, owing to inflationary pressures and a decline in occupancy, as its customers struggled to staff their own production lines due to labor shortages. But as those labor issues have stabilized, and trading at a 7.5% cap rate on our estimate of normalized net operating income, COLD shares have started to rebound.

Another holding, P.S. Business Park (PSB), announced a takeover bid from Blackstone Real Estate at the start of the quarter for $187.50 a share. For PSB, which operates warehouse, office, and industrial park properties, the bid represented a 12% premium to the pre-announcement stock price.  We held the position through quarter end as we found the risk-adjusted return potential of a final dividend and deal spread compression compelling relative to the sector.

Heartland Advisors Value Investing Health Care IconFinancials. While the sector tends to benefit from higher interest rates, there are negative offsets to rising financing costs, including higher credit costs, lower capital markets activity, and lower asset prices that up until recently weren’t priced into the market. As a result, our underweight to Financials paid off in the quarter. So did our underweight to banks and consumer finance, which reduced our exposure to credit risk.

An example is Reinsurance Group of America (RGA), one of the world’s largest reinsurers for life and health coverage,  which is not exposed to property and liability lines. With a strong balance sheet, less credit exposure, and earnings estimates biased upward, we added to our position in RGA, which posted near-double-digit gains in a quarter in which other reinsurers and financial stocks lost ground. 

Heartland Advisors Value Investing Consumer Discretionary Sector IconEnergy. Energy was the third most important driver in our outperformance, behind Real Estate and Financials, and stock selection provided an extra boost. 

Case in point: H.F. Sinclair (DINO), an integrated petroleum refiner that operates in the Southwest, Pacific Northwest, the Plains states, and the Rocky Mountain states. DINO’s crack spread, which is what a refiner receives for their final product less what it pays for crude oil inputs, improved in the quarter, driven in part by greater demand for domestic exports and raw material discounts owing to sourcing some of its crude oil from Canada. 

The stock gained 13.33% in the quarter, during which we trimmed our position. We are not looking to make large sector bets in Energy, as we don’t have a non-consensus view of underlying commodity prices.

Heartland Advisors Value Investing Consumer Discretionary Sector IconHealthcare. We are overweight Health Care, in part because we believe our portfolio holdings’ earnings have room to run, as elective procedure volume still hasn’t fully recovered from Covid-era restrictions. However, some of our holdings continued to underperform in the second quarter.

During the quarter, we sold our position in a global manufacturer of dental supplies and equipment. We recognized our mistake after the company terminated its CEO without providing a reason and issued a first-quarter earnings warning. We were concerned that the CEO was being removed since he was responsible for the company’s self-help strategy. In addition, and counter to our thesis, the profit warning detailed underperforming domestic sales. In recognition of our mistake, we realized a loss on the investment and redeployed the capital elsewhere.

Outlook and Positioning

With the market potentially pricing a recession into many stocks, we are researching opportunities among hard-hit early-cycle cyclicals. If the carnage continues, we anticipate a more definitive early-cycle pivot.

But before that happens, several things need to take place: first, we need to see sell-side analysts materially cut their earnings estimates, and we’d like to see investors digest this development. We’d also like to see management teams start discussing the “weakening demand environment,” which will help investors reset their expectations. Once those two things begin to take place en masse, we expect to see more quality stocks fall and hit our buy targets. It would also help if a recession were officially declared, but we understand that recessions are often declared months after the fact. For example, the recession that began in December 2007, amid the global financial crisis, wasn’t officially declared until a full year later — In December 2008. The equity market bottomed, soon thereafter, in March 2009.

As we sort through the companies that are hitting our radar, we will stay true to our philosophy and process. We don’t know when the markets will rebound, but we believe that, attractively priced and well-financed businesses that generate consistently strong free cash flow will inevitably recover to their intrinsic value to the benefit of patient long-term investors. We believe this disciplined application of our process will be key to navigating the quarters ahead. 

Thank you for your continued trust and confidence. 

Please wait while we gather your results.

Portfolio Management Team

Troy McGlone

Vice President and Portfolio Manager

Colin McWey

Vice President and Portfolio Manager

Composite Returns*


Scroll over to view complete data

Since Inception (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD (%)QTD (%)
Opportunistic Value Equity Composite (Net of Advisory Fees)**9.519.737.295.57-3.55-8.97-7.98
Opportunistic Value Equity Composite (Net of Bundled Fees)7.467.685.353.77-5.00-9.63-8.32
Russell 3000® Value7.0710.397.016.82-7.46-13.15-12.41

Source: FactSet Research Systems Inc., Russell Investment Group, and Heartland Advisors, Inc.
*Performance data is preliminary. 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.

Opportunistic Value Equity Strategy Quick Links



Download PDF



View Commentary

Attribution & Contribution Reports

Sign In



Sign In


Email Sign Up


©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

†Composite returns are net of advisory fees.

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 6/30/2022,  Americold Realty Trust (COLD), H.F. Sinclair (DINO), P.S. Business Park (PSB), and Reinsurance Group of America (RGA) represented 0.83%, 1.62%, 3.22%, and 1.49% of the Opportunistic Value Equity Composite’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.

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.

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 2022 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

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