Bloomberg's "Best in Class"

Transcript: Finding Value in the Small cap space

Interviewer:		Well, in this week’s Best in Class, we look at a small-cap Fund that has outperformed 89 percent of its peers year to year. Brad Evans manages the Heartland Value Plus Fund. It was one of the top 10 best U.S. diversified equity funds in May according to Bloomberg data, making it a Bloomberg Best. Brad, glad you could make it. We’ve been kind of teasing you all along this show about how you’ve been stuck in traffic.
Brad Evans:		The economy’s getting better.
Interviewer:		Exactly. More people are going to work.
Brad Evans:		Exactly right.
Interviewer:		Alright, that’s a good way to look at it. So Brad, with your fund, you focus on value small-caps. First off with small-caps; I know they’ve done actually relatively well vis-a-vis the larger market, but everyone always says, “In a market like this, it’s so volatile. Do you really want to be in small-caps?”
Brad Evans:		Well, I think you just have to take the longer term view. If you look at the performance of small-cap value in particular versus other asset classes, small-cap growth, mid-caps, as well as large-cap value and large-cap growth, small-cap value is the place to be over the very long term. So it is the best asset class from a capital appreciation perspective.
Interviewer:		Historically, right?
Brad Evans:		Historically, yes.
Interviewer:		Okay. Where in the small-cap space though, the small-cap value space, are you finding the best deals?
Brad Evans:		We are, bottoms-up stock pickers, we pray to the altar of value. When I say value, we are focused on companies that are undervalued based on their earnings, their cash flows, strong balance sheets, they pay a dividend, and we wrap all that valuation discipline. It’s a safety net and we wrap it around a catalyst; the catalyst being an event that would allow for the market to understand or view the company we’ve invested in as undervalued.
Interviewer:		And one of those – because I want to get to some names – one of those is Patterson-UTI, which is a land based natural gas driller. It peaks everybody’s interest because you wonder is it of more value now that we’ve got this BP oil spill.
Brad Evans:		I think that’s exactly – you’d rather be lucky than good in some cases and that was not our initial thesis when we invested in capital.
Interviewer:		Right because you’ve been in this for awhile.
Brad Evans:		We have been. So you look at Patterson today. You have a company that’s trading at book value, has no debt and is trading at about four and a half to five times enterprise value EBITDA on this year's 2010 numbers. This company has invested almost their market capitalization and capital expenditures over the last five years. So this is a company that is poised to benefit from any type of renaissance of land based drilling, whether it be natural gas or oil and clearly, the tragedy in the Gulf of Mexico has to raise the specter of increased land based drilling going forward.
Interviewer:		Well you always wonder; I mean as tragic as it is, who are the winners in and out of this though, and it could be this company. Have you thought about acquiring more shares for instance in this or have you looked at other land based onshore drillers?
Brad Evans:		Absolutely. If you look at the sentiment for Patterson, there’s a disproportionate number of sell-side analysts who rate the company hold or sell there’s only a smattering of analysts who rate the company a buy at this point. So it’s still a very contrarian place to be. There’s been a lot of interest in the offshore drillers, obviously, as a result of what’s happened in the Gulf of Mexico. People seem to have a level of benign neglect as it relates to land drillers. We think that, when you look at the level of the rig count here in North America onshore, we’re at a level that is about 85 percent of the prior peak in 2008. But service level intensity is already at over 135 percent, so the industry is getting better much more than people expect.
Interviewer:		And I’m glad you mentioned the word in there, contrarian, because that’s part of the strategy of your fund. At a time like this, when people say there’s not a lot of conviction in the equity markets, how do you be a contrarian?
Brad Evans:		It’s really – it’s zigging when the market is zagging and it’s going to places within the market that are unpopular and having a strong conviction in your ideas. It’s rooted in doing your own fundamental research.
Interviewer:		But, in this market though, where things are just trading at range, what’s the contrarian play? What has been your biggest contrarian play?
Brad Evans:		Well, I think right now regional banks is a great place to be. You can buy healthy regional banks, meaning non-TARP regional banks, no government capital, high levels of tangible common equity, eight to nine percent tangible common equity, trading near book value, with a low level, a low multiple of earnings based on normalized earnings. Assuming that banks can get back to - say 100 basis points of return on average assets. You can find a portfolio of banks that fit that criteria and frankly, as the credit cycle starts to moderate, the earnings power of these banks are going to start to come –
Interviewer:		Right, they may even be at the forefront of that.
Brad Evans:		That’s exactly right.
Interviewer:		Brad, thank you so much. Really appreciate it. Glad you made it.
Brad Evans:		Thank you very much.
Interviewer:		Brad Evans; the Manager of the Heartland Value Plus Fund, our Best in Class. And coming up next, the opening bell in less than four minutes.

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Past performance does not guarantee future results. Performance represents past performance; current returns may be lower or higher. The investment return and principal value will fluctuate so that an investor's shares, when redeemed may be worth more or less than the original cost. All returns reflect reinvested dividends and capital gains distributions, but do not reflect the deduction of taxes that an investor would pay on distributions or redemptions. To obtain performance through the most recent month end, call 800-432-7856, or visit our Funds' Returns page on the website. Subject to certain exceptions, shares of a Fund redeemed or exchanged within 10 days of purchase are subject to a 2% redemption fee. Performance does not reflect this fee, which if deducted would reduce an individual's return.

The Value Plus Fund invests in stocks of small companies that generally are more volatile and less liquid than those of larger companies. Value investments are subject to the risk that their intrinsic values may not be recognized by the broad market. The Fund also invests in a smaller number of stocks (generally 40 to 70) than the average mutual fund. The performance of these holdings generally will increase the volatility of the Fund’s returns.

According to Bloomberg Rankings, the Heartland Value Plus Fund ranked 10 among 20 Top U.S. Diversified Equity Funds for June 2010. The score takes into consideration one-year, three-year and five-year total annualized returns as well as three-year and five-year Sharpe ratios.

As of 6/30/10, the Value Plus Fund was ranked in the 2nd, 1st and 19th percentile among 321, 251 and 129 small value funds for the 3, 5 and 10-year time periods based on risk-adjusted returns.

The statements and opinions expressed in the articles or appearances are those of the author. Any discussion of investments and investment strategies represents the Funds' investments and portfolio managers' views as of the date of the articles, and are subject to change without notice.

The above individual is a Registered Representative of ALPS Distributors, Inc.

Definitions:

A basis point is one hundredth of a percentage point (0.01%).

Book value (BV) is a company's common stock equity as it appears on a balance sheet, equal to total assets minus liabilities, preferred stock, and intangible assets such as goodwill.

EBIDTA (Earnings Before Interest, Taxes, Depreciation and Amortization) is a measure of a company's operating cash flow based on data from the company's income statement. It is calculated by looking at earnings before the deduction of interest expenses, taxes, depreciation and amortization.

Price/Earnings Ratio of a stock is calculated by dividing the current price of the stock by its trailing 12 months' earnings per share.

Tangible common equity is computed by deducting intangible assets, goodwill, and preferred equity costs from the firm's normal book value.

TARP (Troubled Assets Relief Program) was established as a response to the economic crash that occurred around September to October 2008 which put the U.S. economy into a recessionary state. The program was created by the United States Department of Treasury.