Quality at Heartland

Transcript

Have you ever heard the term, “you get what you pay for.”? Generally, there’s some truth to that statement. For example, if I were shopping for a new jacket, I may be willing to pay a premium price if I perceived that item as high quality. 

Many times, when paying a premium, get what you pay for, but other times you may come away unsatisfied with the purchase, realizing later that you overpaid. Like consumers, investors can overpay for quality. 

When it comes to defining quality, investors often define it from a factor perspective, where it represents a combination of returns on capital, leverage, and earnings variability. 

At Heartland, we use our 10 Principles of Value Investing™ to assess quality from a quantitative and qualitative perspective. 

From the quantitative side, we define quality value as generating free cash flow returns on capital in excess of a company’s cost of equity. 
Essentially, this captures companies that consistently generate accretive returns on capital. We also assess other quantitative quality measures such as financial soundness and earnings dynamics.

From the qualitative side, we meet directly with management teams to understand their business strategy, capital allocation priorities, and how executives are compensated, which can impact shareholder friendly behavior and durability of quality measures. 

At Heartland, we use our time-tested 10 Principles of Value Investing™ to guide our process of investing, so we can strive to make confident decisions when it comes to assessing the quality of a business.