Time to be Cautiously Opportunistic

“The intelligent investor is a realist who sells to optimists and buys from pessimists." 
— Benjamin Graham

As a rule, investors seem to spend far too much time worrying about whether to be optimistic or pessimistic about the state of the markets or the health of the economy. As Ben Graham pointed out, the intelligent investor can make money in both buoyant and fraught markets, so long as they remain more disciplined than the investors from whom they are buying stocks and to whom they are selling. 

We believe this is the right message for this market. 

By most accounts, equities had a rough start to the year, as economic concerns that started to bubble up in the second half of 2021 rose to the surface in the first quarter, at around the same time the first land war in Europe since World War II broke out. This put the market in a decidedly defensive mood, which only intensified after the Federal Reserve delivered on its promise to start raising interest rates to try to get control over inflation. As the yield curve flattened in March, concerns emerged about economic growth in the months ahead.

A Renewed Focus on Valuations

Historically, when investors think growth is about to become scarce, they are often willing to pay a premium for growth stocks. Yet we’ve been encouraged with the market’s reaction so far this year. 

Now that inflation and rates are on the rise, investors appear more mindful of downside risk and valuations, which serves to strengthen the tailwind that attractively priced, profitable, and well-managed companies began to enjoy late last year. In addition, as shown below, many smaller companies continue to trade at significant discounts to large-cap names, which we believe is a reason to favor small-cap names in this environment. These are shifts that we welcome. 

Heartland Advisors Value Investing Total Market Cap to GDP Chart

Source: ©2022 The Leuthold Group, 1/1/1983 to 2/28/2022.  The Leuthold 3000 Universe is defined as the largest 3,000 securities traded on U.S. exchanges. Universe was segregated into large- and small-cap tiers. Blue bars identify recessionary periods of July 1990 to March 1991, March 2001 to November 2001, and December 2007 to June 2009. Price/Earnings Ratio (P/E). Past performance does not guarantee future results. There is no guarantee that a particular investment strategy will be successful.

Cautiously Opportunistic

We don’t disagree with the market’s defensive lean. We believe there is a reason to be cautious and to look for downside mitigation. Right now, for instance, we’re focused on businesses that have the potential to hold up better in a volatile, down-trending market. However, we don’t believe it makes sense to literally or figuratively “head for the sidelines.” In fact, as Ben Graham pointed out, it’s in times like this when investors who act on their emotions create opportunities for their patient, value-minded counterparts.

In this market, we continue to find opportunities to buy what we view as exceptional businesses at below-average valuations due to market inefficiencies created by passive capital flows. Our work continues to lead us to small and mid-sized companies that have already been repriced to reflect a more somber business climate in the coming quarters. 

We believe our disciplined focus on valuations, balance sheet strength, and catalysts that can result in a change in perception by investors is the right approach for this market—and for the long run. Our bottom-up analysis suggests there may be opportunities to go on offense in the coming quarters. 

We thank you for your continued trust and confidence.

Your Heartland Team


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Past performance does not guarantee future results.

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There is no guarantee that a particular investment strategy will be successful.

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

The statements and opinions expressed in this article are those of the presenter(s). Any discussion of investments and investment strategies represents the presenter’s 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. Any forecasts may not prove to be true. Economic predictions are based on estimates and are subject to change.

Growth and value investing each have unique risks and potential for rewards and may not be suitable for all investors. A growth investing strategy emphasizes capital appreciation and typically carries a higher risk of loss and potential reward than a value investing strategy; a value investing strategy emphasizes investments in companies believed to be undervalued.

Small-cap and large-cap investment strategies each have their own unique risks and potential for rewards and may not be suitable for all investors. Small-cap investment strategies emphasize the significant growth potential of small companies, however, small-cap securities, are generally more volatile and less liquid than those of larger companies. Large-cap investment strategies emphasize the stability of large companies, however, large-cap securities are more susceptible to momentum investments and may quickly become overpriced or suffer losses.

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