Heartland Advisors likes insurance brokers, energy

BANGALORE (Reuters) - There's value to be found in this rangebound market in areas like insurance brokerages, North American natural gas as well as some industrials, a fund manager said.

Brad Evans, who helps manage more than $2 billion in assets at Heartland Advisors, said he is cautiously optimistic on U.S. equity markets considering a possible recovery in the country's economy sometime in 2009.

"Investors continue to be stuck in that mentality that we need to get international exposure to avoid the U.S. slowdown and I think that's going to turn on itself, maybe it is already," Evans told Reuters from Heartland's offices in Milwaukee, Wisconsin.

One of Evans' funds, the Heartland Value Plus, which has about $502 million in assets, is ranked first on a year-to-date performance basis as of July 31 out of 586 funds in the small-cap value category, data from fund analytics company Lipper, a unit of Thomson Reuters, shows.

Beyond regular valuation metrics for a company such as price-to-earnings and price-to-cash flow, Evans also looks at the private equity market value, or the value of a particular business to a financial or strategic buyer, based on a past completed transaction of a like business.

"We've cast our net and found a new idea. We're very optimistic on Brown & Brown," Evans said.

Brown & Brown (BRO.N), an insurance broker, is likely to benefit from a hardening insurance market where premiums are likely to edge higher given deteriorating combined ratios, increased catastrophe losses and reduced investment income.

Moreover, in early June, Willis Group Holdings (WSH.N), the world's third largest insurance broker at the time, bought smaller rival Hilb, Rogal and Hobbs Co HRH.N for $1.7 billion.

Based on that deal's valuations, as well as Evans' own projections for Brown & Brown, he feels fair value for the company's shares is in the $28-$30 range over the next 12 to 18 months.

That represents an appreciation of about 30 percent from current levels.

However, Evans is still underweight the financials as a sector.

"While banks may look cheap statistically there's still some downside risk left that isn't priced in," Evans said. "Investing in banks right now is speculative and that's not our cup of tea."

RECESSION? PLAY SMALL CAPS

"Whether we're currently in a recession or not I don't know but it sure feels like it," Evans, who has more than 11 years of investment industry experience, said.

But with growth in Europe slowing, Japan weakening and the brakes being applied to emerging markets, Evans feels a global easing cycle would allow the U.S. to be the first economy to come out of a downturn.

"If you see the ECB (European Central Bank), Bank of Japan and Bank of China starting to cut rates, that would portend a stronger dollar and that would be very positive for U.S. markets," Evans said.

He feels that U.S. small-caps are the best way to get exposure to an improving U.S. economy 12 months down the road.

The missing ingredient is stable oil prices.

"Oil needs to come off the boil and the U.S. economy should start to do a little better," Evans said.

STILL LIKES ENERGY

Despite the sharp fall in crude prices, Evans is sticking to some bets in energy and is still overweight the sector.

Some of his funds' biggest positions are in North American natural gas plays, which he feels are good value.

"When you take into consideration long-term globalization issues, emerging market industrialization, resource depletion across the globe and then you throw in geo-political risks, U.S. natural gas is a very attractive long-term investment."

Evans continues to own exploration and production companies like Cimarex (XEC.N) and St. Mary's Land & Exploration (SM.N), where he finds the risk-reward favorable.

Cimarex's "bullet-proof" balance sheet, production heavily weighted towards North American natural gas and a net asset value of about $75-$85 a share are attractive, Evans said.

The company also has oil and gas reserves that are almost completely unhedged allowing it to participate in higher prices.

St. Mary's has exposure to some of the hottest plays like the Bakken in North Dakota, Woodford in Oklahoma and Haynesville in Louisiana, where larger companies like XTO Energy (XTO.N) and Chesapeake Energy (CHK.N) have made large acreage acquisitions.

St. Mary's is not a well-loved company, Evans says, with only four of the 13 analysts who cover it rating it a buy, eight with a hold and one with a sell.

"There's no uniformity of opinion on this one and frankly its more skewed to people who are fairly negative on the company because, let's face it, a hold is a sell on the Street," Evans said.

But playing contrarian bets in small-caps has paid dividends for Evans in the past and he hopes for similar successes in the future.

"Nobody loves this company really so we're going to sit and just wait to see what happens."

(Editing by Jarshad Kakkrakandy)