Top returns from 'undervalued, underloved'

Will Nasgovitz started buying Constellation Brands Inc. shares in March after the world's largest winemaker said earnings this year would fall short of analysts' estimates and the stock dropped almost 20 percent.

Constellation Brands shares have gained 25 percent since then, making the producer of Mondavi wine and Corona beer the latest "misunderstood, undervalued and underloved" company to help the Heartland Select Value Fund, Nasgovitz said. The fund has beaten the Standard & Poor's 500 index for eight of the last 10 years.

The $352 million Heartland fund also generated higher returns than all 92 competing managers of value mutual funds during the last decade, according to data compiled by Denver-based research firm Lipper Inc. Heartland Select Value climbed at an annual pace of 12 percent in the period. The fund rose 19 percent in the 12 months that ended July 31, to rank 38th of 427 funds.

"We're looking for names that are down and out," Nasgovitz said in an interview in New York. "That's where we find the better ideas."

His fund's best performers this year are Canadian oil-field-equipment-maker ShawCor Ltd. and Goodrich Corp., the world's largest supplier of aircraft-landing gear. Both stocks rose more than 40 percent.

Nasgovitz, 29, who studied finance at the University of Wisconsin in Madison, has worked at Heartland Group Inc., of Milwaukee, the firm founded by his father, Bill Nasgovitz, for four years. Heartland Group oversees $3.4 billion.

Will Nasgovitz's fund rose at an annual pace of 9.5 percent since he started running it in May 2006, exceeding the 3.1 percent return from his father's $1.9 billion Heartland Value Fund.

Value investors purchase shares of companies considered cheap relative to financial yardsticks such as profit. The average stock held by Nasgovitz has a price-to-earnings ratio of 14.3, lower than the 15.9 average of competing funds, data compiled by Chicago-based research firm Morningstar Inc. show.

Select Value has a Sharpe ratio of 1.27, compared with 1.02 for its peer group, Morningstar reported. A higher ratio means better risk-adjusted returns. Morningstar gives the fund four out of a possible five stars.

"Success is the norm here," Morningstar analyst Michael Breen said.

Heartland Select Value holds as few as 40 stocks, or about a third of what rival value funds own. Besides low valuations, Nasgovitz and fellow managers Theodore Baszler, Hugh Denison and David Fondrie invest in companies such as J.B. Hunt Transport Services Inc., the second-largest U.S. trucking company, and Renasant Corp., the owner of Renasant Bank and Renasant Insurance, where executives are increasing their stakes.

The fund owns companies ranging from aluminum-maker Alcoa Inc. and insurer the Allstate Corp., which have market values of more than $30 billion, to electronics-manufacturer Plexus Corp. and oil-and-gas driller Grey Wolf Inc., at less than $1.5 billion.

Nasgovitz began buying shares of Smithfield Foods Inc., the world's biggest pork processor, for about $28 a share in November 2005. He bought more at the start of last year when the Smithfield, Va., company's stock fell to about $26 as the price of corn almost doubled. They now trade at about $32.

"If some of our names get hit," he said, "we'll take advantage."

The fund has lost money on home builders amid the worst U.S. housing market in 16 years. Nasgovitz is keeping his positions in Horsham-based Toll Bros. Inc., the largest U.S. developer of luxury homes, and Fort Worth, Texas-based D.R. Horton Inc., the second-biggest residential-construction company, because he expects the industry to emerge from its recession during the second half of 2008.

Toll shares have fallen 17 percent and D.R. Horton dropped 39 percent since the fund bought the stakes in July 2006.

ShawCor's stock has more than doubled since Nasgovitz began buying shares in March 2006, helped by the 19 percent gain in oil prices. The Toronto-based company applies corrosion protection to pipelines in the North Sea and West Africa.

Select Value bought shares of Goodrich in 1999, when it was known as BFGoodrich, formerly a tire-maker. The stock rose at an average annual rate of 17 percent since then, compared with 3.1 percent for the S&P 500. Nasgovitz doubled his holding in 2006, after the shares underperformed the index for the first time in four years.

"When John Q. Public isn't interested in a stock," Nasgovitz said, "that's a bullish signal to us."

Managers: Will Nasgovitz, Theodore Baszler, Hugh Denison, David Fondrie.

Assets: $352 million.

Performance: Up

7.2 percent in 2007.

Noted holdings: ShawCor Ltd., Goodrich Corp., Toll Bros. Inc.

Ticker: HRSVX.EndText