Heartland Advisors

1Q25 Value Plus Commentary Podcast

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Michael Kops: Hello, I'm Michael Kops, Vice President at Heartland Advisors. I'm here with Andy Fleming, Portfolio Manager for the Heartland Value Plus Strategy.

Andy, at the end of last year, investors seemed to be betting on faster growth in anticipation of reduced regulations and pro-growth fiscal policies. But the mood of the market shifted in the first quarter. What are your thoughts on this?

Andy Fleming: I agree with you, Mike. The mood has definitely shifted. The mood has shifted, I would say, almost 180 degrees in the past month. That the mood is now decisively defensive.

Mike: How might fear in the market affect the broader economy? 

Andy: The concern is that fear in the market will dim consumer sentiment, which will then dim consumer spending, which will then dim GDP, because as you know, the consumer is close to 75% of U.S. GDP.

Mike: What role is the volatility playing in the management of the strategy?

Andy: Well, the markets are definitely extremely volatile right now. We're seeing extreme greed and extreme fear depending on the day. The key here is we're trying to keep our cool and stick to our process regardless of what the market dictates at a given day.

Mike: How might you expect the portfolio to behave in a market like this?

Andy: The aim that we have set out to achieve here is to outperform on down days, and the aim is to be in line on up days. And the reason this should happen is because of the strong balance sheets and the low leverage that we have in the portfolio relative to our peer group and the benchmark.

Mike: In the first quarter, the Value Plus strategy lost 8.05%, compared with the 7.7% decline for the Russell 2000® Value Index, what do you attribute your performance to?

Andy: Generally speaking, we had strong selection across the portfolio, with the exception of the IT sector. Within the IT sector, we underperformed, and this offset the strong selection we had in the other sectors.

Mike: Can you give us a stock example that might help us understand how you're thinking in this market?

Andy: Sure. CTS Corporation (CTS) is a longstanding Value Plus holding.

It's an electronics component company that's held in the IT sector. There is a strong management team in place here that has a very solid capital allocation policy in place. In addition, they're in a net cash position, so very low financial risk.

Right now, the company is trading at under 9X EBITDA with an 8% free cash flow yield and low CapEx requirements. So there's a lot of free cash flow that the company can deploy, and it is deploying it with buybacks, a strong dividend, and selectively the company's looking at tuck-in M&A. So despite the soft for the company in the quarter, this is a management team and a company that we have a lot of confidence in going forward.

Mike: I know you believe this market requires a balanced approach. How are you acting on this idea of balance?

Andy: The key here is not to be too offensive or defensive-minded. We're not taking big sector bets. We have exposure to more offensive sectors, such as Financials and Consumer Discretionary, but we also have exposure to more defensive sectors, such as Staples and Utilities. The key is to have a balance and exposure in both types of companies.

Mike: Thanks for your time, Andy.

Andy: Thanks, Mike.

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Author

Heartland Advisors Value Investing Relationship Manager Michael Kops

Michael Kops

Vice President and Partner

Heartland Advisors Value Investing Portfolio Manager Andrew Fleming

Andrew J. Fleming

Director of Research, Vice President, and Portfolio Manager

 

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Past performance does not guarantee future results.

Performance information refers to preliminary Composite data. Final quarterly performance information can be found here: Small Cap Value Plus.

The Small Cap Value Plus Strategy primarily invests in companies that have a market capitalization consistent with the capitalization range of the Russell 2000 Value Index, with a majority of its assets invested in companies that pay dividends. The Strategy intends to capture the long-term appreciation of small-caps, while minimizing the volatility of returns inherent in the small-cap market.

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