Heartland Small Cap Value Strategy 2Q22 Portfolio Manager Commentary

 Executive Summary

  • Amid persistent inflation, higher interest rates, and record-low consumer sentiment, the major stock indexes entered a bear market.
  • In this volatile environment, value continued to outperform growth.
  • As investors discount an economic slowdown, there is likely an opportunity ahead to add well-researched, quality companies at attractive valuations.
  • We believe the portfolio, priced at single digits to estimated earnings, exhibits compelling risk-reward characteristics.

“There are no new eras—excesses are never permanent.”

​​​​​​—Bob Farrell

With inflation higher than expected, the Federal Reserve dramatically raised interest rates and the broad market fell into the third bear market in the past 15 years. An unprecedented era of free money has come to an end and, with it, sky-high valuations for Unicorns, Crypto’s, IPO’s, and growth stocks priced for perfection.

The ever-popular NASDAQ Composite was hit hard, dropping -30% year to date, while the S&P 500 Index fell -20%. Many unprofitable companies, once valued in the billions, have plummeted -50%, -75%, or more, from their recent highs. Small value stocks were not spared but held up better, with the Russell 2000 Value Index off -18%.

This across-the-board selling has taken down high-quality companies alongside speculative fare. We admit to being a bit frustrated by the indiscriminate selling thus far—a few of our holdings have been marked down to only four times earnings, while some are priced below cash per share and many below book value. In the end, bear markets aren’t much fun but offer the possibility for enterprising, disciplined value investors to get a crack at well-managed companies with strong balance sheets that usually don’t fall into the low price-to-earnings value category.

Extremely Negative Sentiment Sets up Opportunities

No one knows when this bear market will end, but we do know investor sentiment is extremely negative.

One gauge, a recent University of Michigan survey of consumer sentiment, fell to a record low of 50 in June. That’s the lowest level since 1952! Since consumers account for about 70% of GDP, historic drops such as this signal a potential economic slowdown which investors are pricing in.

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

Source: University of Michigan, University of Michigan: Consumer Sentiment [UMCSENT], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UMCSENT, 1/1/1978 to 6/30/2022 monthly. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

Multiple compression has occurred, and stock prices could continue to be pressured as analyst estimates ratchet lower. However, historically low sentiment readings such as this have been a precursor to better stock returns ahead. In fact, when consumer sentiment drops to extreme lows, the small cap Russell 2000 Value Index has outperformed the Russell 3000 Growth Index and the broad market by over +5% on a three-year average.

In our view, this presents an ideal setup for active fundamental research coming to the fore.

As Benjamin Graham eloquently stated, “The intelligent investor is a realist who sells to optimists and buys from pessimists.” Thus, for discerning investors who have the patience to look past current market gyrations, near-term vulnerability is creating an opportunity for small cap bargain hunters.

Companies We Know 

One such opportunity is Carriage Services (CSV), a leading owner of funeral homes and cemetery operations throughout the country. CSV’s economies of scale, professional management, and superior operating model has allowed it to take share organically and through value-added acquisitions, in what we view as an attractive, highly cash flow generative industry. The stock has sold off materially, likely in sympathy with its consumer discretionary peers that are often economically sensitive. We continue to forecast robust fundamentals for CSV as its demand tends to be highly inelastic. Trading at less than 10 times enterprise value to EBITDA and at 11 times Heartland’s estimate of current year earnings, we think CSV is an attractive investment.

Numerous other such portfolio optimization activities, which we view as low hanging fruit, have occurred during the quarter, both within current portfolio holdings and related to companies we have researched and owned in the past. We believe these actions centered on valuation analysis should serve our clients well.

Companies with Pricing Power

With inflation remaining persistent, the ability to pass on rising prices has become a real test for companies and a differentiator for the performance of their underlying securities.

As can be seen by any trip to the gas station, another pocket of pricing power has been Energy, which was a top-performing sector on a year-to-date basis. In this area, HF Sinclair (DINO) was a standout for the portfolio. Sinclair is a refiner, which is the process that converts crude oil into a mix of differentiated petroleum products, including gasoline. The profitability, known as the crack spread, of a refinery comes from the difference in value between the crude oil it processes and the finished goods it produces. DINO has benefitted from favorable supply and demand dynamics, both from extremely low inventory levels of refined product and due to geographically advantaged supply costs related to the types of crude feedstock they use (20% of its oil is Western Canadian crude which is priced lower than West Texas Intermediate). The outcome of this combination has been outsized crack spreads to the positive. After a doubling in price in the stock, we trimmed the position, with the majority still held, as we believe the company’s current returns profile warrants a sizable premium to the current valuation modestly above book value and just six times estimated earnings. 

Energized Industrials

Though a recession could weigh on economically sensitive sectors in general, one area seeing strength is among Industrials exposed to the Energy patch and Utilities. 

Northwest Pipe Co. (NWPX), North America’s largest manufacturer of engineered steel water pipe systems, with 50% share, is benefitting from the growing demand for clean water, which has rebounded post COVID-19 and remains heightened by drought and population growth in warmer, drier regions of the country. Last quarter, Northwest’s backlog hit a record high of more than $400 million, and a strong bidding environment bodes well for future business. Yet Northwest Pipe remains an attractive value in the water sector, as the stock is priced well below its peers at eight times cash flow and 12 times earnings per share.

CECO Environmental Corp. (CECE), serves the industrial air quality and fluid handling markets. The company is transitioning from a cyclical, project-driven business to a more predictable, higher-margin and diversified environmental and pollution control equipment business. Successful evolution should be rewarding, as targeted peers trade in the low double-digit EV/EBITDA range vs. the company’s current mid-single digit mark. Heartland believes investors underappreciate the growth and earnings potential underway, and the recent earnings report represented movement in the right direction with record orders and backlogs, which were contracted with what is expected to be nicely expanded profitability. Also, we are encouraged by consistent, meaningful buying of CECO shares by officers and directors.


Amid the current sell-off in equities, the significant valuation disparity between growth and value stocks has narrowed, but in our opinion has much further to go. It will take some time for this massive speculative bubble to fully deflate. In the meantime, we remain focused on the same disciplined investment process that we have been utilizing for decades to uncover undervalued businesses priced well below their intrinsic worth. 

So far, in a period of excessive pessimism, we have been able to assemble a portfolio of what we believe to be compelling opportunities that should participate in the continuing resurgence of common-sense value investing. 

Thank you for your continued trust and confidence.

Small Cap Value Composite Valuations

Heartland Advisors Value Investing Value Fund Valuations

Source: FactSet Research Systems Inc., Russell®, Standard & Poor’s, and Heartland Advisors, Inc., as of 6/30/2022. 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.

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Portfolio Management Team

Will Nasgovitz

CEO and Portfolio Manager

Bill Nasgovitz

Chairman and Portfolio Manager

Composite Returns*


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Since Inception (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD (%)QTD (%)
Small Cap Value Composite (Net of Advisory Fees)**10.684.195.3310.89-6.53-12.71-9.89
Small Cap Value Composite (Net of Bundled Fees)9.153.635.0210.57-6.81-12.84-9.96
Russell 2000® Value9.919.054.896.18-16.28-17.31-15.28

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 10/1/1988. 
**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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©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 return is net of advisory fees.

Past performance does not guarantee future results.

The Small Cap Value Strategy seeks long-term capital appreciation by investing in micro- and small-cap companies, generally with market capitalizations of less than the largest companies in the Russell 2000 Value Index, at the time of purchase. The micro- and small-cap segment of the stock market is robust with thousands of publicly traded issues, many of which lack traditional Wall Street research coverage. Thus, we believe this market is often inefficient, mispricing businesses and offering opportunities for fundamental research-minded investors such as Heartland.

The Small Cap Value Strategy 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.

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, Carriage Services, Inc. (CSV), CECO Environmental Corp (CECE), HF Sinclair Corp (DINO), and Northwest Pipe Company (NWPX) represented 1.37%, 3.24%, 1.76%, and 3.10% of the Small Cap Value Composite’s net assets, respectively.  

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.

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.

Bear Market occurs when the price of a group of securities is falling or is expected to fall. Book Value is the sum of all of a company’s assets, minus its liabilities. Cash Per Share is calculated by dividing the free cash flow of a company by the number of shares outstanding. Consumer Sentiment Index is a telephone survey conducted by the University of Michigan Consumer Research Center, which phones 500 consumers to ask their opinion on personal finances and business conditions. Consumers are asked five questions concerning household financial conditions and their expectations for household financial conditions in one year; their expectations for business conditions in one year as well as expectations for the economy in five years, and their buying plans. This release provides an early indication of consumer expectations that are a leading indicator for the business cycle. The monthly survey has a moderate impact on the financial markets because if consumer confidence declines, then consumer spending is likely to weaken. The data is seasonally adjusted. With consumer spending making up two-thirds of gross domestic product, consumer behavior is closely watched. 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). Inflation Risk is the possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency. Initial Public Offering (IPO) NASDAQ is a global electronic marketplace for buying and selling securities, as well as the benchmark index for U.S. technology stocks. NASDAQ was created by the National Association of Securities Dealers (NASD) to enable investors to trade securities on a computerized, speedy and transparent system, and commenced operations on February 8, 1971. 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. 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. Russell 3000® Growth Index measures the performance of those Russell 3000® 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. 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.