Heartland Advisors

The Return of Fundamentals

         
“Risk comes from not knowing what you're doing."
— Warren Buffett
              

Fear returned to the market in a big way in the first quarter. And for selective, long-term value investors like us, this was welcome news.

Whether or not bank failures in March wind up sparking a full-fledged financial crisis, one thing seems clear: A year into the Federal Reserves’ tightening cycle, rising rates are putting balance sheets under pressure, leading to tighter lending standard, widening credit spreads, and a growing perception of risk.

Those concerns will weigh on the markets in the near term. Yet other developments bode well for the long term. For instance, common sense seems to be returning to the market. As recently as late January, only 7% of U.S. chief executives surveyed by The Conference Board said they were preparing for a deep recession. That’s likely to change, amid growing fears over the stability of the banking system.

And in a world of lending and liquidity concerns, fundamentals matter again, as investors are now demanding evidence of financial strength in the aftermath of the recent collapse of Silicon Valley Bank, Signature Bank, and Silvergate Capital. For value investors looking to own well-run businesses at reasonable prices, this is a heartening turn — despite the rising risks.

Risk, of course, isn’t just a reflection of external forces like rising rates and widening credit spreads. It is also a function of what investors know — or more to the point, don’t know — about the companies they own, as Warren Buffett famously noted. At a time when financial, market, and economic risks are all on the rise, minimizing investor risk by knowing what you own is more critical than ever.

At Heartland, having strict standards and maintaining discipline is ingrained in our 10 Principles of Value Investing™, which demands that we focus on compelling valuations, balance sheet strength, and sound business strategies. We also prefer companies with positive earnings dynamics, and profitability is particularly important in volatile times. Given that the percentage of non-earners in the small-cap benchmark remains at uncomfortable levels, this is a time for active value investors to focus on disciplined selectivity.
 

Shareholder Letter 1Q23
Source: FTSE Russell; Jefferies, monthly data from 1/31/1985 to 2/28/2023. This chart represents the small cap’s percentage of the US equity market by trailing earnings and forward earnings. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

This is also an environment that calls for a balanced approach and taking what the market is giving. Investor anxieties are creating promising opportunities for long-term investors to identify leading companies trading at discounted prices that are also financially strong enough to withstand and thrive in this environment.

Fundamentally Yours, 
the Heartland Team
 

 

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Past performance does not guarantee future results.

An investor should consider the Funds’ investment objectives, risks, and charges and expenses carefully before investing or sending money. This and other important information may be found in the Funds' prospectus. To obtain a prospectus, please call 800-432-7856 or visit heartlandadvisors.com. Please read the prospectus carefully before investing.

Investing involves risk, including the potential loss of principal.

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.

 

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

The Heartland Funds are distributed by ALPS Distributors, Inc.

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

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