Quick Take: The managers of Heartland Value Plus Fund (HRVIX) like stocks that aren't covered by Wall Street analysts or only have sell recommendations. A contrarian, Rodney Hathaway and the fund's co-managers, William Nasgovitz and Eric Miller, look for out-of-favor companies in order to find stocks trading below their intrinsic value.
To lessen the risks of unpopular stocks, the fund's team searches for companies that pay dividends, since they are likely to be stable. Most of the holdings in the Value Plus fund, in fact, pay dividends.
Hathaway's search for promising out-of-favor sectors has led the fund to the basic materials sector. Recent cutbacks in excess capacity has boosted pricing power for several basic materials companies, he says.
The fund's focus on stable, unpopular companies has paid off recently as well as over the long term. For the one-year period through last month, the portfolio rose 37.3%, versus a 30.8% gain for its small-cap value peers. For the three-year period through May, the fund was up 20.5%, on average, versus a 10.3% gain for its peers.
Despite the fund's focus on out-of-favor stocks, Value Plus is slightly less volatile than most of its peers. The fund's three-year standard deviation of 18.0% is a little lower than the peer group average of 18.2%.
The Full Interview:
S&P: Heartland Funds has several value offerings. How does Heartland approach value investing?
HATHAWAY: We buy stocks trading below their intrinsic values. We focus on stocks with low price-to-earnings ratios, low price-to-cashflow ratios, and low price-to-sales ratios. We also look for companies with strong balance sheets and low debt.
S&P: How does Heartland Value Plus differ from other Heartland offerings?
HATHAWAY: Value Plus focuses on dividend-paying stocks. Most of the fund's holdings pay a dividend. If a company pays a dividend, that implies it is stable and has good cash flows. Dividends also generally lower a stock's volatility.
S&P: What are your stock selection criteria?
HATHAWAY: We use a proprietary ten-point grid to evaluate our investments. The first point on the grid is a potential holding should have a catalyst. We look for catalysts in potential investments to avoid value traps. Catalysts we like include new managements, new regulations affecting the company, or anything that opens up value for investors.
The final item on our ten-point grid is technical analysis. We like stocks that are out of favor with Wall Street. Many of our holdings aren't covered by Wall Street or only have sell recommendations. We do a lot of our own investment research.
S&P: Do any market areas currently look attractive or undervalued?
HATHAWAY: Over the last few months, we've beefed up our holdings in basic materials. We have a few paper, steel, and fertilizer companies. Many companies in these industries were severely depressed for several years. As a result, several basic materials companies cut excess capacity, boosting their price power.
