Michael Kops: Hello everyone, I’m Michael Kops, Vice President at Heartland Advisors. I’m here with Andy Fleming, portfolio manager for the Heartland Value Plus Strategy.
Andy, in the aftermath of the election, investors began gravitating toward parts of the market deemed to be the winners of President-elect Trump’s agenda, which included tech stocks and cryptocurrencies. Where have you been focusing your attention?
Andy Fleming: We are continuing to look for ‘green shoots’, but we’re actually finding ‘green shoots’ across different sectors and across many different parts of the market.
Mike: So, how do green shoots fit into the Strategy?
Andy: So, the way I like to define ‘green shoots’, it’s really that nexus or that kind of handoff of the baton when a company’s been previously been really focused internally, focused on self-help, taking costs out to right-size a business, and now starting to see some tailwinds for the business. So, you have this nice handoff where we were focused internally, right-sizing the business, and now growth is starting to accelerate. And the result of these two things happening in that order is that it can lead to a lot of operating leverage for companies.
Mike: In the fourth quarter, the Value Plus Strategy was down 1.58%, compared with the 1.06% loss for the Russell 2000® Value Index. What do you attribute your performance to?
Andy: We had really strong stock selection in IT and Financials, and this offsets some poor stock selection in other sectors.
Mike: I see. Well, so you're looking for ‘green shoots’ across the market, and we've had some outperformance in some sectors and underperformance in others. When you're thinking about a new idea, how does it fit into portfolio construction?
Andy: Well, first and foremost, we have to think about risk management. So, we need to make sure that any new add fits in in the context of the portfolio as a whole. Assuming it does fill a need in the portfolio, then we're really going to focus on, you know, self-help, valuation, balance sheet, and a strong catalyst.
Mike: Excellent. Can you give me an example, maybe in Financials?
Andy: Sure. So, a really strong outperformer in the fourth quarter and really 2024 as a whole was FB Financial (FBK).
This is a Nashville-based bank. And when we think of Financials in general, we think of two buckets. We think of banks and non-banks. And we're looking at banks such as FB Financial. We want to look at banks that operate in growth geographies. FBK would check the box there. It's based in Nashville. I mean, it operates in the Sunbelt. We want to look at reasonable valuation. FBK checks the box there. It's trading at or below its 10-year average on both price to tangible book value and earnings. And if we can find it, we want to find a company that has insider buying. FBK has that. And then if you can find it again, this self-help idea that I talked about earlier. And FBK did that in 2024. They repositioned or restructured, I should say, their securities portfolio. They executed some cost takeouts. And the result of those actions will be earnings growth by itself. And now we're having actual acceleration as the company is pointing to nice loan growth in 2025, coupled by the cost takeouts that I just mentioned. So that should lead to nice earnings acceleration in 2025 for the company.
Mike: Nice. Is there anything more broadly that gives you confidence in the market?
Andy: Yeah, there is. It's really this idea of ‘green shoots’ that I just talked about.
So, the cost outs that have already happened being married with acceleration in the base business. And what we're seeing is these ‘green shoots’ are broadening out to more and more sectors and companies within each sector. So that's giving me a lot of confidence as I think about 2025 small caps.
Mike: Thanks for your time, Andy. And thanks to all those who listened in.
Andy: Thanks, Mike.