Heartland Value Plus Fund 3Q26 Portfolio Manager Commentary

The Value Plus Fund fell 8.26% in the third quarter, compared with the 4.91% loss for the Russell 2000® Value Index. That underperformance was largely the result of stock selection. In the quarter, our negative selection effect was most pronounced in Energy, Consumer Discretionary, and Industrials. By contrast, our selection effect was positive in Real Estate, Financials, and Materials.

One thing that became evident was that fundamental characteristics that had been overlooked throughout the year, such as free cash flow yield, started to pay off in the quarter. Other quality factors such as return on equity, return on investments, and return on assets have also held up since the end of June.

An example of a high-quality company in our portfolio that also happens to benefit from an improving PMI is Quaker Houghton (KWR). As a leading supplier of fluids used in metal production and metalworking processes, Quaker should capitalize on a jump in industrial production. The steel industry is KWR’s top end market, along with general manufacturers and vehicle original equipment manufacturers (OEMs). The company’s products represent a small cost in the production process, but for end users, they are mission critical. If these fluids are not used properly, they can ruin an entire batch of metal. KWR aims to add value by bringing employees on site to help them ensure the chemicals are used correctly. 

Until recently, the ISM Manufacturing PMI has been contracting since 2022, impacting the company’s volume and profitability. The new CEO, who took over last year, used this difficult period to focus the company’s efforts on things that they can directly control, like providing a better value proposition to its customers to take market share from competitors and cut costs. Quaker has now had 12 consecutive quarters of revenue growth ahead of its end-market growth, which we believe sets the company up to perform well as improved PMI leads to gains in end-market demand. 

Yet, KWR is currently trading at less than 10 times next year’s EBITDA, even though it has historically traded around 12 times EV/EBITDA. As industrial production levels improve, we see upside from higher earnings and potential for a re-rating closer to its historic average multiple. Meanwhile, management is giving us further confidence through share buybacks and a 17th consecutive year of raising dividends. 

Another company buying back stock and boosting payouts—two of the three metrics we look for in capital allocation, along with insider buying—is Hanover (THG). This property and commercial insurance company focuses on small- to medium-sized businesses. We believe the company is threading the needle by managing to raise the premiums it charges while also growing volume in a slow and steady manner. Yet the stock is trading at a discount on earnings. Should THG hit our price target, its price/earnings ratio would still be just 13 times, based on an average of 2026 and 2027 earnings per share. 

One of our Fund’s Technology holdings, Tyler Technologies (TYL), is a leading provider of software solutions and services to public sector organizations, including school districts, city and county offices, and law enforcement. 

TYL’s shares lost around half their value since August 2025 amid fears that generative AI tools could disrupt software businesses like this. But we believe the market has overly discounted the company’s future prospects. In fact, we think AI could actually provide a meaningful tailwind for TYL’s fundamentals, in the form of revenue growth and margin expansion, as the software maker begins to use and deploy its own AI products. For its part, management has stated that AI could nearly double their total addressable market.

Meanwhile, due to high switching costs, strained resources, and compliance burdens, public sector entities are slower than private to adopt new technology, and TYL offers the data, domain expertise, and technical knowledge to be their customers’ AI provider of choice. Giving us further confidence, insider buying began to accelerate in February while the company executed $755 million of its $1.5 billion repurchase authorization in the first half of 2026.

One of the biggest detractors to our performance was Primo Brands (PRMB), a leading U.S. hydration company, which offers consumers water through five-gallon jugs, refill stations, and ready-to-drink formats. 

This was a volatile quarter for the stock. The company sold off early in the quarter on concerns related to execution and rising input costs, but subsequently PRMB beat earnings expectations, causing the stock to rise. Later, a large shareholder announced plans to liquidate a portion of its position through a secondary offering, which put pressure on the stock. Management chose to participate in the secondary offering, effectively buying back stock from the selling shareholder, while the CEO further demonstrated confidence by personally purchasing more than $2 million in shares in the open market following the sell-off.

We remain committed to the stock on the strength of improving fundamentals, insider buying, active buybacks and an increasing dividend. Moreover, the company is trading at just 7.5 times EV/EBITDA, a significant discount to its 10-year average multiple of 10 times. 

Outlook

Despite the challenges we faced in the third quarter, we believe this is a fertile environment for our Strategy. An improving economy, coupled with a broadening market, renewed focus on fundamentals, and a greater appreciation for valuations is precisely the backdrop that disciplined active managers like us covet. This is a market that requires research, judgement, and the flexibility to adjust. We continue to see solid opportunities, but we also recognize the need to stay true to our 10 Principles of Value Investing™. We seek to manage risk while directing capital only to businesses with a solid foundation for long-term returns.