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July 6, 2007, 11:59 p.m. EDT

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By John Kimelman

MENTION HEARTLAND ADVISORS and some investors with long memories might cringe.

That's because the firm got into some serious hot water back in 2000 when the Securities & Exchange Commission alleged that several of Heartland's officers misrepresented the asset values of two municipal-bond funds. Morningstar, the fund tracking service, is still blacklisting the fund house because of this scandal.

But while Heartland and the SEC have battled it out in the courts over the years, the company has put up strong numbers with some of its stock funds.

Heartland has long been known as first-rate small-cap stock picker, using a value-oriented approach that weaves together almost a dozen variables, including insider trading activity and technical analysis.

But in company also has a solid multi-cap fund, the Heartland Select Value Fund over the past decade, the fund has generated a 13.7% annualized return, besting the Standard & Poor's 500 by almost six percentage points a year. The fund has also handily outperformed the S&P 500 over the past five and three-year periods.

Recently, Barron's Online caught up with Will Nasgovitz, one of the fund's four portfolio managers and the 29-year-old son of the firm's founder, Bill Nasgovitz.

Excerpts of the interview follow.

Q: I see that insider ownership is obviously important for you. How strong does purchasing by insiders have to be before you're interested?
A: I mean it is more helpful on the smaller cap side. It's helpful when I see a company that was a high-flyer and then hits a road block It becomes under loved and it goes from five analyst buys and no sells to five sells and no buys on it. And then you start to see the insiders start buying. You know we have seen that kind of behavior in one of our holdings that really did peak our interest in last summer. It's J.B. Hunt Transport Services /zigman2/quotes/205536609/composite JBHT +0.28% .
We were really intrigued with how they were shifting their business from just a pure trucking dedicated model to emphasizing the inter-modal business. So the insider trading there was the catalyst at the time. I'm really bullish on the long term outlook there.

Q: How do you know whether insiders are buying for public-relations reasons or because they really think the stock is likely to go up?
A: That's why you have to get your hands dirty and really understand why you think the insiders are buying. So I think the insiders saw what we saw about the business.

Fund Facts
Heartland Select Value
Assets: $351 million
Expense Ratio: 1.25%
Load: None
Annual Portfolio Turnover: 51%
Yield: 0.43%
Top 10 Holdings
H & R Block /zigman2/quotes/207406664/composite HRB HRB
Goodrich Corp. GR
J.B. Hunt Transport /zigman2/quotes/205536609/composite JBHT JBHT
SLM Corp. /zigman2/quotes/205828282/composite SLM SLM
ShawCor SCLA
Alcoa /zigman2/quotes/200686102/composite AA AA
Pfizer /zigman2/quotes/202877789/composite PFE PFE
Mastec /zigman2/quotes/207965492/composite MTZ MTZ
SunTrust Banks STI
Smithfield Foods SFD

Q: Let me ask you a little bit about your use of technical analysis. I read on your Web site that once you have identified stocks that you believe are undervalued and have potential for price appreciation; you then use technical analysis as a tool for avoiding investments that already maybe subject to undo speculation. What do you like to see in a stock, technically speaking?
A: We love to see "basing" charts. For example, a typical chart for a Heartland stock is not going to be something that is directionally headed up from the bottom left corner to the top right corner, We like stocks that went from 10 to 5 and have been hanging out at 5 for some time. We've seen it test bottom a few times. We love to see double and triple bottoms. We like to identify where maybe we could find a nice entry point.
We love to see that when a stock has bad news, the stock doesn't go down that day. That is a great indicator for us. We might even see some insider buying at that point. . A classic example of that is a busted growth story, Pentair /zigman2/quotes/208874493/composite PNR +0.26% , a good mid-cap stock. ( Editor's Note: Pentair operates as a diversified industrial manufacturing company. It operates in two segments, Water and Technical Products. Some of its products include turbine pumps, and solid handling pumps for water and wastewater applications, and pool pumps. The Technical Products segment designs, manufactures, and markets custom enclosures that protect sensitive electronics and electrical components, thermal management products, and accessories. )
The stock had sold off for a number of reasons: firstly, the management had been focused just on top line growth and acquisitions and ended up overpromising and underdelivering. And there was significant exposure to new residential construction and all of us are well aware of what's going on there. The stock sold off to 25 because of these two factors. We saw some small insider buying by directors. We looked longer term in '2008 timeframe and now you have got a new CFO on board that is focused on return on capital and margin enhancement.
We like the stock and we've been a holder of that since probably the fourth quarter of last year. We saw some insider buying, and there was technical support at the $25 a share level.

Q: I notice management experience is one of the criteria you use in selecting a stock. Give me an example of a management team that really blows your socks off.
A: The management team at Albany International /zigman2/quotes/208627197/composite AIN -0.19% .

Q: I'm not familiar with them, what do they do?
A: Their core business is paper-machine clothing. (Editor's Note: Paper-machine clothing is used to produce all grades of paper from lightweight sanitary tissue to heavyweight container board. These custom-designed engineered fabrics, essential to the paper-making process, are manufactured from monofilament and synthetic fiber materials. ) It doesn't sound very exciting, does it?

/zigman2/quotes/205536609/composite
US : U.S.: Nasdaq
$ 129.40
+0.36 +0.28%
Volume: 990,255
July 31, 2020 4:00p
P/E Ratio
28.33
Dividend Yield
0.83%
Market Cap
$13.65 billion
Rev. per Employee
$311,896
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/zigman2/quotes/207406664/composite
US : U.S.: NYSE
$ 14.50
-0.35 -2.36%
Volume: 7.43M
July 31, 2020 4:02p
P/E Ratio
1,169
Dividend Yield
7.17%
Market Cap
$2.79 billion
Rev. per Employee
$34,788
loading...
/zigman2/quotes/205536609/composite
US : U.S.: Nasdaq
$ 129.40
+0.36 +0.28%
Volume: 990,255
July 31, 2020 4:00p
P/E Ratio
28.33
Dividend Yield
0.83%
Market Cap
$13.65 billion
Rev. per Employee
$311,896
loading...
/zigman2/quotes/205828282/composite
US : U.S.: Nasdaq
$ 6.77
-0.07 -1.02%
Volume: 4.19M
July 31, 2020 4:00p
P/E Ratio
5.42
Dividend Yield
1.77%
Market Cap
$2.54 billion
Rev. per Employee
$1.11M
loading...
/zigman2/quotes/200686102/composite
US : U.S.: NYSE
$ 13.00
-0.18 -1.37%
Volume: 10.36M
July 31, 2020 4:00p
P/E Ratio
N/A
Dividend Yield
N/A
Market Cap
$2.42 billion
Rev. per Employee
$965,500
loading...
/zigman2/quotes/202877789/composite
US : U.S.: NYSE
$ 38.48
-0.26 -0.67%
Volume: 27.04M
July 31, 2020 4:00p
P/E Ratio
15.30
Dividend Yield
3.95%
Market Cap
$213.75 billion
Rev. per Employee
$580,595
loading...
/zigman2/quotes/207965492/composite
US : U.S.: NYSE
$ 39.78
+1.96 +5.18%
Volume: 2.42M
July 31, 2020 4:00p
P/E Ratio
9.29
Dividend Yield
N/A
Market Cap
$2.93 billion
Rev. per Employee
$363,654
loading...
/zigman2/quotes/208874493/composite
US : U.S.: NYSE
$ 42.85
+0.11 +0.26%
Volume: 3.17M
July 31, 2020 4:03p
P/E Ratio
21.54
Dividend Yield
1.77%
Market Cap
$7.11 billion
Rev. per Employee
$296,510
loading...
/zigman2/quotes/208627197/composite
US : U.S.: NYSE
$ 48.08
-0.09 -0.19%
Volume: 443,259
July 31, 2020 4:00p
P/E Ratio
14.05
Dividend Yield
1.58%
Market Cap
$1.56 billion
Rev. per Employee
$223,291
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