Wish List Time

“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices." 
— Warren Buffett

While we wholeheartedly agree with Mr. Buffett that a downturn creates opportunities for investors to boost their exposure to high-quality businesses at attractive prices—which we are doing—we’d be lying if we said this selloff hasn’t been somewhat frustrating. 

But we also understand that “individuals who cannot master their emotions are ill-suited to profit from the investment process,” as Buffett’s mentor, Benjamin Graham, famously pointed out. It is our steadfast belief that a disciplined approach to value investing is about conquering one’s impulses and frustrations and overcoming fear to take advantage of opportunities when others are panicking.

Historically, the beginning stages of a bear market tend to exhibit indiscriminate selling, as fearful investors take down high-quality companies alongside low-quality speculative fare in their haste to head for the sidelines. This affords patient value investors, like us, the opportunity to build positions in well-managed companies that usually don’t fall into our valuation parameters. That seems to be the situation we find ourselves in today. 

More Room to Fall?

Forward earnings estimates for the S&P 500 remain elevated, especially in light of the fact that real retail sales growth has taken a sharp turn downward this year.

Heartland Advisors Value Investing Total Market Cap to GDP 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.

We don’t know when the bear market will end or how much further stocks might fall. Nor do we know when an official recession will be declared or how long it might last. However, we do expect volatility to be persistent. This is, after all, the first downturn in more than three decades unfolding while the Federal Reserve is having to fight inflation, which creates its own uncertainties. We also believe the pain felt in the equity markets thus far has largely been driven by multiple compression, as the speculative air has been squeezed out of the market. Stock prices could continue to be pressured in the coming months as analyst estimates, which still seem far too optimistic, are ratcheted lower and as more companies reset their earnings and revenue guidance amid recession fears.

With the market quickly pricing in a potential recession in many stocks, we are eagerly assembling our wish list of well-managed companies that stand to benefit not only in the early stages of the next cycle but for years to come. We are looking for well-managed businesses with quality balance sheets, little leverage, and strong free cash generation. For an added level of safety, we prefer companies that are self-financed and don’t require perpetual loans and debt to grow. 

As we sort through such 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 are confident that eventually well-run and well-financed businesses that are priced attractively will bounce back to the benefit of patient long-term investors. We believe this disciplined application of the Ten Principles of Value Investing™ will be key to navigating the quarters ahead.

Thank you for your continued trust and confidence. 

Your 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.

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