Heartland Small Cap Value Strategy 4Q20 Portfolio Manager Commentary

 Executive Summary

  • The Small Cap Value Strategy posted double-digit gains for the year, beating the Russell 2000® Value Index. 
  • The current speculative frenzy is reminiscent of the Dotcom era of the late 1990s. 
  • The gap in performance and valuations between Value and Growth has only been this striking two other times in 50 years.
“A bear market in common sense is often followed by a bull market in prudence.”
—Bill Nasgovitz

2020: Put a Cork In It

The investment backdrop of 2020 might best be described as a champagne market—dizzying, expensive, full of bubbles and destined to lead to a painful hangover for many. Much like champagne, the bubbles in many asset classes crept up slowly, knocking out common sense and encouraging the impulsive.

The following are just a few examples where excessive exuberance has led to inflated asset prices ripe for popping.

  • DoorDash, Inc. (Dash), the money-losing food delivery company became public in December at $102 per share (raised from $75). DASH catapulted 80% the first day of trading to $182.
    Valuation: $56 Billion market cap priced at 63X Sales. Earnings? Maybe some day.
  • Tesla, Inc. (TSLA) shares jumped 70% in five weeks not because of any news on profits or sales but because it was being added to the S&P 500 Index. Its $669 billion market value is greater than nine major carmakers—including GM, Ford, Fiat-Chrysler, Volkswagen, Hyundai and Honda—combined. Priced at a stunning 300X estimated earnings, 23X sales!
  • Feeling lightheaded yet? If not, don’t worry, more bubbly is on the way. 

Estimates suggest another 500 unicorns valued at $1 billion each are lining up to go public in 2021.

During this speculative frenzy, reminiscent of the 1999 internet craze, we are pleased to note that our investment approach resulted in the Small Cap Strategy posting double-digit gains, beating the Russell 2000® Value Index for the year.

Who’s Pouring?

What’s driving these pervasive capital market excesses and the chase to overpay? 

In our view, “investors” fear of missing out, momentum investing, historically low interest rates plus a growing glut of cash all contribute.

The Federal Reserve’s money printing has been a strong elixir. As the chart below details, the U.S money supply has boomed at record double-digit levels. To finance the deficit and support our economy, the Fed is printing money at incredible rates. 

A Flood of Money

Heartland Advisors Value Investing M2 Money Stock Chart

Source: Board of Governors of the Federal Reserve System (US), M2 Money Stock [M2], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/M2. 11/2/1981 to 12/21/2020 weekly. M2 includes a broader set of financial assets held principally by households. Seasonally adjusted M2 is computed by summing savings deposits, small-denomination time deposits, and retail MMMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1. Past Performance does not guarantee future results. 

The result of the Fed’s monetary policy of accelerating the supply of money has been to weaken the U.S. dollar and heighten speculative activity. 

Yes, the aforementioned momentum/growth stocks have benefited. Also, due to the loss of the dollar’s value, investors keen on maintaining their purchasing power, have sought refuge in inflation hedges including commodities, cryptocurrencies, precious metals, selective real estate and other “hard” assets.

Seeing Straight

Instead of joining in the chase of overpaying for potential growth based on excessive optimism, we’ve stuck with our principles to search out small, well-managed businesses, priced at a considerable discount to our determination of their intrinsic worth. Simply put, our goal is to pay 50 cents for a dollar of real value.

The price paid is of utmost importance requiring significant due diligence to dig deep to unearth underappreciated assets and earnings power.

It requires discipline and the willingness to go against conventional wisdom, avoid crowd psychology, while maintaining a deep reservoir of patience.

Here are some examples of this effort held in your portfolio.

Value Vindicated

A recently announced acquisition of one of our holdings appears to confirm our investment thesis. 

Early this year we took a stake in an Industrial REIT that specializes in warehouses and distribution centers as the sector was still recovering from the steep COVID-19 sell-off. 

Our confidence came from management’s history of prudent capital allocation, a growing list of Fortune 500 customers and focus on warehouse properties to meet the growing needs of online retailers. Perhaps due to its smaller market cap, the business was priced at a significant discount to larger competitors while sporting a handsome cap rate and well financed dividend. 

In mid-December, others recognized the company’s value as well and offered to buy the REIT at a substantial premium to our cost.

With interest rates near all-time lows, we believe the search for under-appreciated assets and sustainable dividends will intensify.

The portfolio should be a beneficiary. 

Smiles for Miles

We recently initiated a position in Thor Industries Inc. (THO), the largest recreational vehicle (RV) manufacturer in the world. The company owns iconic brands including Airstream, Dutchmen, Jayco and Keystone, among others. Interestingly, this market leader was valued as a small cap and at only .5X of sales. 

We believe the market continues to underappreciate the staying power of the resurgence in RV-ing. Recent data for the industry points to double-digit growth in demand, including strong interest in entry-level vehicles—a sweet spot for Thor. 

The renewed excitement around open-road traveling resulted in roughly a 18% jump in Thor’s sales and low inventory on dealer lots should translate to further sales growth. We are encouraged by Thor using its robust free cash flow to reduce debt. Despite the positive developments, the business is priced at only 7X our estimate of normalized earnings, almost a 50% discount to historical levels. The current valuations, in our view, represent a compelling opportunity to own a market-leader with meaningful upside potential.

Supplier to the In-Crowd?

While investors are clamoring to pay top dollar for a chance to ride along on money-losing tech juggernauts, we’ve been busy looking for beneficiaries from the booming Tech sector but at prices we believe will help mitigate downside risk. nVent Electric PLC (NVT), a manufacturer of parts used for electrical connections and enclosures designed to protect equipment in high heat environments, fits this profile.

Since nVent’s spin off several years ago, management has been nimble in targeting cost savings, as well as bringing new products to market, including 24 new offerings launched in the first half of 2020 alone.

This progress has positioned nVent, in our view, to capitalize on booming data center demand as well as an inventory restocking cycle. Despite its attractive mix of a steady pipeline of sales with significant growth opportunity ties to the IT sector, shares are trading at just 11X our estimate of 2021 earnings.

A Golden Goose? 

Deficit spending continues unabated with the Federal Reserve pulling out all the stops to finance it. Thus, by stimulating the economy, the money supply has ballooned–historically a boon for the price of hard assets such as gold.

Fortunately, we’ve been able to identify well-managed participants in the space. One is Centerra Gold Inc. (CAGDF) $11.59*, a gold miner and long-term holding. We’ve been attracted to Centerra due to management’s conservative capital allocation, immense free cash flow and geographic diversification strategies.

After opening their newest low-cost mine, on time and on budget, Centerra now has mines on three continents: North America, Eastern Europe and Asia. We like this diversification and its rock-solid balance sheet with minimal debt and impressive cash hoard.

Centerra recently announced it was selling two non-core assets which could boost cash to $900 million, or about $3 per share. At current gold prices, the company throws off immense cash flow: its FCF yield approaches 20%, supportive of a growing dividend. 

Priced at a 6.8X this year’s EPS and only 5X next, the business is remarkably undervalued.

A Rare Opportunity? 

The gap in performance and valuations between Value and Growth has only been this striking two other times in the past 50 years—during the Nifty Fifty bubble of the early 1970s and during the Internet craze of the late 1990s-2000. In both instances, the growth bubble burst and it was a rewarding time to be a value investor. 

If, as we suspect, the growth-at-any-price delirium of the past decade is on the verge of fizzling, we believe the valuations and strong balance sheets held in your portfolio and shown below will go a long way in helping investors capitalize on what we view as a third-in-a-lifetime opportunity. 

With that, we’ll leave you with a toast for a healthy and prosperous 2021 and the return of a bull market in common sense. 

Thank you for your continued trust and confidence.

Small Cap Value Composite Valuations

Heartland Advisors Value Investing Valuation Chart

Source: FactSet Research Systems Inc., Russell®, Standard & Poor’s, and Heartland Advisors, Inc., as of 12/31/2020 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.


*As of closing price on 12/31/20

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Portfolio Management Team

Bill Nasgovitz

Nasgovitz is Chairman and Portfolio Manager of the Value Fund and its corresponding separately managed account strategy. He has 52 years of industry experience, 38 at Heartland.

Will Nasgovitz

Nasgovitz is CEO and Portfolio Manager of the Opportunistic Value Equity Strategy, as well as the Mid Cap Value Fund, the Value Fund, and their corresponding Mid Cap Value and Small Cap Value Strategies. He also is President and Director of Heartland Funds. He has 20 years of industry experience, 17 at Heartland.

Composite Returns*


Scroll over to view complete data

Since Inception (%)10-Year (%)5-Year (%)3-Year (%)1-Year (%)YTD (%)QTD (%)
Small Cap Value Composite (Net of Advisory Fees)**11.083.606.808.4220.0920.0923.15
Small Cap Value Composite (Net of Bundled Fees)9.482.936.498.0919.7419.7423.06
Russell 2000® Value10.198.669.653.724.634.6333.36

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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©2021 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 $2.5 billion 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 12/31/2020, Centerra Gold Inc., nVent Electric PLC, and Thor Industries Inc. represented 3.88%, 1.05%, and 1.51% of the Small Cap Value Composite, respectively. DoorDash, Inc., Fiat Chrysler Automobiles NV, Ford Motor Company, General Motors Company, Honda Motor Co Ltd, Hyundai Motor Corp., Tesla, Inc., Volkswagen A G Unsponsored Represent 1 10th Sh AD were unowned. 

Statements regarding securities are not recommendations to buy or sell.

Portfolio holdings are subject to change without notice. Current and future portfolio holdings are subject to risk.

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 the articles or appearances are those of the presenter. 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 2020 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

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

Book Value is the sum of all of a company’s assets, minus its liabilities. Buyback is the repurchase of outstanding shares (repurchase) by a company in order to reduce the number of shares on the market. Cash Per Share is calculated by dividing the free cash flow of a company by the number of shares outstanding. Dividend Yield is a ratio that shows how much a company pays out in dividends each year relative to its share price. Earnings Before Interest and Tax (EBIT) is an indicator of a company’s profitability, calculated as revenue minus expenses, excluding tax and interest to eliminate the effect of different capital structures and tax rates used by different companies. 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). Earnings Per Share is the portion of a company’s profit allocated to each outstanding share of common stock. 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. 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. Tangible Book Value is the sum of all of a company’s assets, minus its liabilities and intangible assets, such as goodwill. Total Debt/Total Capital Ratio of a stock is calculated by dividing the short- and long-term debt obligations of the company by its total capital, which is represented by the company's debt and shareholders' equity, which includes common stock, preferred stock, minority interest and net debt. 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.