Heartland Advisors

Heartland Opportunistic Value Equity Strategy 3Q23 Portfolio Manager Commentary

Executive Summary

  • The “soft landing” vs “hard landing” economic debate heated up this quarter, but for fundamentally driven investors, this was just noise.
  • In our view, making top-down bets is a fool’s errand; investors should instead focus on bottom-up stock selection.
  • Despite the uncertainties in this market, we remain cautiously optimistic.

Third Quarter Market Discussion

Warren Buffett famously stated that he makes “no attempt to forecast the general market — my efforts are devoted to finding undervalued securities.” That’s how we’ve always gone about our business, and it certainly represents how we approached the recently ended quarter. 

Throughout the third quarter, there was great debate surrounding the health of the economy. While most investors now believe that a “soft landing” is the base-case scenario, there are plenty who are worried about the economic headwinds blowing in, including tighter lending standards, strains in the commercial real estate market, and new-found concerns over the strength of the consumer. Among them: the sharp decline in the personal savings rate, the uptick in consumer loan delinquencies, persistent inflation punctuated by rising gas prices, and slumping confidence in the expected future state of the economy. 

Although consumers appear assured about the current environment, history shows that a wide gap between their view of today’s economic situation versus their future prospects, as represented by the Conference Board’s Present Situation Index (see below), often signals weaker economic growth ahead. While a much-anticipated recession has taken longer to transpire than many thought, the full effect of Federal Reserve monetary policy tightening has yet to be reflected in economic activity.

Consumer Confidence Index v. Real GDP Growth

Source: FactSet Research Systems Inc., Quarterly data from 3/31/1978 to 6/30/2023. This chart represents consumer confidence which is defined as present situation/expectations index compared to the real GDP – year over year percent change. All indices are unmanaged. It is not possible to invest directly in an index. Past performance does not guarantee future results.

Whether a soft landing is in the cards or not, our goal remains the same: be patient and disciplined investors while identifying opportunities through our 10 Principles of Value Investing™. We want to remain nimble and use this period of uncertainty to find well-managed, financially strong, and attractively priced businesses that can grow cash flow and value over time.

Attribution Analysis

For the quarter, the Strategy outperformed the Russell 3000® Value Index, posting gains of 0.05% versus -3.15% for the benchmark. In a somewhat volatile market where stocks rallied in July and sold off as long-term interest rates rose materially, positive gains were achieved in six of the eleven sectors, led by Energy (+16.82%), Utilities (+11.23%), and Materials (+9.19%).

Stock selection was the key driver of outperformance, with particularly strong showings in Industrials, Materials and Utilities. The only area where selection detracted from the Strategy’s performance was Information Technology.

Last quarter, we discussed how narrow the market’s breadth had been all year, as just a handful of the largest stocks accounted for the lion’s share of the market’s returns. Earlier in 2023, this put our all-cap Strategy at a disadvantage, as the S&P 500 Index more than doubled the returns of the Russell 2000 Small-Cap® Index between January 1 and June 30.

While market breadth has yet to broaden meaningfully, the playing field did begin to even out this quarter. Within the Russell 3000 Value® Index, small caps outpaced large stocks by around 500 basis points in July but gave more than that back over the past eight weeks. For the quarter, there was little disparity by market cap in the all-cap benchmark, removing a hindrance — at least for the moment. We wouldn’t be surprised if headwinds intensified before market breadth improves on a sustainable basis, which typically occurs early in a capital market cycle following the onset of an economic recession. 

Portfolio Activity

It should be noted that our overweight to small- and mid-caps, relative to our benchmark, is not a top-down call. We let our bottom-up stock selection organically dictate our weightings, and that focus on security selection is showcased in the following businesses:   

Industrials. Canadian National Railway (CNI) is one of five Class I freight railroads in the U.S. and Canada, which operate with high margins because of an attractive industry structure. A typical freight customer has only one or two choices when shipping products via rail, and alternative modes of transportation are significantly more expensive. As a result, railroads are blessed with robust pricing power. CNI shares slumped in the third quarter, as the freight market entered a recession and as Canadian wildfires disrupted network efficiency. 

While these challenges should be temporary, we believe self-help strategies that management has instituted will bolster results for years to come. They include expansion projects in Halifax and Prince Rupert and a strategic shift from a focus on margin maximization to on-time train departures that’s aimed at improving rail service. These initiatives should drive market-share gains from the more costly truck market and result in higher earnings power over a cycle.

We first purchased CNI in 2020, after the COVID-19 induced market selloff. As the stock rebounded in the aftermath of the pandemic and approached our estimate of intrinsic value, we reduced our position. With shares now trading at a meaningful discount to value, we added to the position.  

Trading at 18X next 12 months’ forecasted earnings, the stock doesn’t look extremely cheap on paper. However, CNI normally trades at a 10% to 20% premium to the S&P 500 and at 25-30x cycle trough earnings. In our opinion, this is a better business than most, yet we are paying an average price after estimates have been cut. 

Technology. We initiated a position in Teradata Corp. (TDC), the largest provider of enterprise data analytics for complex workloads, during the quarter, but this is a company we’ve followed for nearly a decade. 

Companies use TDC to predict a variety of events, such as when customers might switch to rivals, when parts are about to fail, or if transactions look fraudulent. Despite a business environment that is less conducive to spending, Teradata reported continued progress on growing recurring revenue from the cloud, even as other enterprise IT companies (including those of much higher-valued companies) are reporting decelerating results. 

We held TDC in 2014-15, but our mistake then was not recognizing that the business model needed to change from an on-premise/licensing model to a software-as-a-service model. Since then, we have observed how “sticky” Teradata’s business really is, which only increased our confidence in the company’s competitive advantages. A new management team was hired in 2020, and they’ve implemented necessary changes with clear signs of progress. 

The stock, which declined during the quarter, seems to be considerably undervalued, as recurring cloud revenues are valued much higher than on-premise sales across the software landscape, and the business trades at around 3X recurring revenues today. To put that in perspective, tech analysts typically value peers showing zero growth at roughly 5 to 6X recurring revenues while we expect TDC to deliver reasonable growth in this area. Furthermore, we believe the roughly 9% free cash flow yield provides a margin of safety in an environment where industry valuations are under pressure.  

Materials. Chase Corp. (CCF) represents a good example of how we were able to uncover value in small caps, where there tends to be less information available. 

CCF is a specialty chemical company whose operations were originally concentrated in the production of industrial tapes used to coat and protect critical industrial infrastructure including wire, cable, fiber optic, and pipelines. Over time, the company used cash flows from that business to acquire niche companies in the corrosion protection, waterproofing, adhesive, and sealants markets.  

When we initially purchased Chase, the company was trading at a valuation in line with its chemicals industry peers, despite the company’s superior profitability, balance sheet, and management team. The disconnect, in our opinion, stemmed from a lack of attention on the company. There are no sell-side analysts covering the company and management doesn’t  provide guidance or hold earnings calls. Additionally, a significant portion of the company is held by insiders, which prevents large money managers from buying a stake that they deem “meaningful”. We believe insider ownership is a positive attribute because it ensures management’s interests are aligned with ours.

In July, the company agreed to be acquired by the private equity firm KKR for $127.50 per share. While we were not ecstatic about the announcement — because we think this is a great business with a very capable management team — this take-out is an example of the benefits we enjoy by doing work that others will not.


Despite the uncertainties in this market and the likelihood of an economic downturn, we remain cautiously optimistic. We are not overly focused on the macro headlines. Instead, we are using this period to search for promising businesses that may go on sale. We also believe that eventually, this narrow market, led by just a handful of mega-cap stocks, will broaden to the benefit of investors who have the flexibility to find the best opportunities from a bottom-up standpoint across cap sizes. We will wait patiently for that to happen.

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Portfolio Management Team

Heartland Advisors Value Investing Portfolio Manager Troy McGlone

Troy McGlone

Vice President and Portfolio Manager

Heartland Advisors Value Investing Portfolio Manager Colin McWey

Colin McWey

Vice President and Portfolio Manager

Composite Returns*

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Source: FactSet Research Systems Inc., Russell Investment Group, and Heartland Advisors, Inc.
*Yearly and quarterly returns are not annualized. The Strategy's inception date is 9/30/1999. 
**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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Past performance does not guarantee future results.

The Opportunistic Value Equity Strategy seeks to capture long-term capital appreciation by investing in companies with market capitalizations greater than $500 million. The Strategy’s flexible pursuit of value positions it as a core holding for investors.

In addition to stocks of large companies, the Opportunistic Value Equity Strategy invests in stocks of small- and mid-cap companies that are generally less liquid than large companies. The performance of these holdings generally will increase the volatility of the strategy’s returns.

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 the Institutional Sales Team at Heartland Advisors, Inc. at the address listed below.

As of 9/30/2023,  Canadian National Railway (CNI), Chase Corp. (CCF), Teradata Corp. (TDC), represented 1.47%, 2.92%, and 1.12% of the Opportunistic Value Equity Composite’s net assets, respectively.

The future performance of any specific investment or strategy (including the investments discussed above) should not be assumed to be profitable or equal to past results. The performance of the holdings discussed above may have been the result of unique market circumstances that are no longer relevant. The holdings identified above do not represent all of the securities purchased, sold or recommended for the Advisor’s clients.

Statements regarding securities are not recommendations to buy or sell. 

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

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 this article are those of the presenter(s). 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.

In certain cases, dividends and earnings are reinvested.

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 2024 FactSet Research Systems Inc., FactSet Fundamentals. All rights reserved.

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

Bottom-up is an investment approach that de-emphasizes the significance of economic and market cycles. This approach focuses on the analysis of individual stocks and the investor focuses his or her attention on a specific company rather than on the industry in which that company operates or on the economy as a whole. Consumer Confidence Index (Conference Board): measures Americans’ attitudes about current and future economic conditions. It is based on a monthly survey of 5,000 households conducted by The Conference Board and is benchmarked to a base year of 100 in 1985. 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. Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. Inflation Risk is the possibility that the value of assets or income will decrease as inflation shrinks the purchasing power of a currency. Intrinsic Value is the actual value of a company or an asset based on an underlying perception of its true value including all aspects of the business, in terms of both tangible and intangible factors. This value may or may not be the same as the current market value. Insider Buying is the purchase of a company's stock by individual directors, executives or other employees. Margin of Safety is a principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value. 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 Russell Investment Group. Russell 2000® Index includes the 2000 firms from the Russell 3000® Index with the smallest market capitalizations. All indices are unmanaged. It is not possible to invest directly in an index. Russell 3000® Value Index measures the performance of those Russell 3000® Index companies with lower price/book ratios and lower forecasted growth characteristics. All indices are unmanaged. It is not possible to invest directly in an index. Sell-Side Analyst is an individual who typically works for a brokerage firm and evaluates companies for future earnings growth and other investment criteria. They sometimes place recommendations on stocks or other securities, typically phrased as "buy", "sell", or "hold." 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. 10 Principles of Value Investing™ consist of the following criteria for selecting securities: (1) catalyst for recognition; (2) low price in relation to earnings; (3) low price in relation to cash flow; (4) low price in relation to book value; (5) financial soundness; (6) positive earnings dynamics; (7) sound business strategy; (8) capable management and insider ownership; (9) value of company; and (10) positive technical analysis.