Heartland Advisors

The Case for Hope and Optimism

         
“A pessimist sees the difficulty in every opportunity. An optimist sees the opportunity in every difficulty."
— Winston Churchill
              

What a wonderful time this is to be an enterprising value investor.

At first blush, this may seem like an odd thing to say. Despite a bounce in the first half of the fourth quarter, the Nasdaq composite is still down more than 30% in 2022 while the S&P 500  has lost nearly 20%. Consumer confidence remains lower than it was during the global financial crisis. And investors are similarly glum, with nearly $5 trillion sitting on the sidelines, weary of risk-taking. 

Yet as some of the smartest historical figures have pointed out, it’s exactly in difficult times when opportunities present themselves. It’s up to investors to take notice. We believe that even in a bear market, there’s a bull emerging somewhere. And if a recession is on the horizon, there are still companies with competitive advantages that set them apart. As bottoms-up stock pickers, our job is to use this environment to add well-run businesses with unique tailwinds, when they are sufficiently undervalued. 

The good news is the likelihood of finding attractively priced companies appears greater in small caps. After a historic run for giant name-brand growth stocks in recent years, small-cap’s share of total market value remains lower today than in the dotcom era of the late 1990s, as demonstrated in the chart below. 
 

Heartland Advisors Value Investing Total Market Cap to GDP Chart
Source: Center for Research in Security Prices (CRSP®), The University of Chicago Booth School of Business; Jefferies, Monthly data 12/1/1930 to 11/30/2022. The data in this chart represents small cap’s percentage of the US equity market. Note: Small is represented by deciles 6-10 based on market cap. All indices are unmanaged. It is not possible to invest in an index. Past performance does not guarantee future results.

We are also encouraged by several developments that continued to unfold in the recent quarter: 

  • Valuations and Balance Sheets seem to matter again, as typically happens when rates rise and investors recognize that the cost of capital is no longer free.
  • Value continues to outperform growth. In the fourth quarter, the Russell 2000 Value Index was up approximately 8%, beating the Russell 2000 Growth Index by more than 3 percentage points. For the year, value outpaced growth around 10 points.
  • And new opportunities are presenting themselves in this challenging market. The key is being willing to wait for financially sound, well-managed leaders to fall to attractive levels.

We believe this patience, discipline, and focus on financial soundness, which are all traits found in our 10 Principles of Value Investing™, will be rewarded. This is why we are optimistic on the long-term outlook for the Heartland Funds.
 
Thank you for your continued trust and confidence,
Your Heartland Team

 

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©2024 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

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.

 

Small-cap investment strategies, which emphasize the significant growth potential of small companies, have their own unique risks and potential for rewards and may not be suitable for all investors. Small-cap securities are generally more volatile and less liquid than those of larger companies.

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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