Heartland's 10 Principles of Value Investing

We define "value" according to our proprietary 10 Principles of Value Investing™ — a process through which we routinely evaluate all our stock transactions. Through this disciplined process we have been able to deliver long-term investment results while limiting downside risk.

1. Catalyst for Recognition
   To maximize long-term gains, we identify specific catalysts that we believe will cause a stock’s price to rise, closing the gap between a current stock price and the true worth of the underlying company.
    
2. Low Price in Relation to Earnings
   Historically, low P/E stocks have outperformed the overall market and provided investors with less downside risk relative to other equity investment strategies.
    
3. Low Price in Relation to Cash Flow
   Strong cash flows give a company greater financial flexibility – and in the hands of capable management, can be the foundation for stronger earnings and, in turn, higher stock prices.
    
4. Low Price in Relation to Book Value
   Book value is a company’s total assets minus liabilities. We believe low Price/Book Value stocks offer investors potential downside risk protection. A low Price/Book Value often suggests sentiment about a stock or sector is overly negative.
    
5. Financial Soundness
   We prefer investing in companies that are not encumbered by long-term debt. During difficult periods, such low-debt companies are able to direct cash flow to investments in operations, not interest expense.
    
6. Positive Earnings Dynamics
   Quite simply, we favor companies with improving earnings and upwardly trending earnings estimates. After all, we believe earnings drive stock prices.
    
7. Sound Business Strategy
   To evaluate management’s strategy for growing their business, our investment professionals meet face-to-face with hundreds of CEOs, CFOs and VPs. It is also typical for us to speak with customers, suppliers and competitors.
    
8. Capable Management and Insider Ownership
   Capable management means effectively implementing sound business strategies. In addition, we believe meaningful and increasing stock ownership by company officers and directors is tangible evidence of their personal commitment. Moreover, it aligns their long-term interest with the shareholders’ interest.`
    
9. Value of the Company
   We routinely ask whether each stock is a compelling value relative to others in its industry. To answer this, we use a number of traditional parameters such as Price/Earnings, Price/Cash Flow and Price/Book Value, but that is just the beginning of our analysis. We also evaluate the value of a franchise or brand name that cannot be replicated and search for other hidden assets not yet recognized by the market.
    
10. Positive Technical Analysis
    Having identified stocks that we believe are undervalued – and have potential for price appreciation – we use technical analysis as a tool for avoiding those investments that may already be subject to undue speculation. We are attracted to stocks that have “bases,” trading within a narrow price range which has typically followed a down trend, or bear market.