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Chuck Royce Buys Hawkins Inc., Myriad Genetics, and Fairchild Semiconductor

July 07, 2011 | About:
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Chuck Royce is the president, co-chief investment officer, and portfolio manager at Royce & Associates, a mutual fund group dedicated to small-cap value investing. As one of the pioneers of small-cap investing, Royce has had a strong performance over the past ten years with his Premier Fund, earning a 10-year cumulative of 186.5% that trumped the S&P 500's return of 16.4%. As of 03/31/11, Royce & Associates has $42 billion under management. His investment fund works to understand the underlying business strategy of small-cap companies, focusing on a company's performance over an entire business cycle and the range of options at management's disposal to guide the company. Given the volatility of small-caps, Royce has an extremely diversified portfolio of more than 1400 stocks. For each company they purchase, Royce's fund establishes buy and sell triggers that are built around their estimation of the company's worth. They target high quality small-cap companies with low leverage, survivability in tough economic times in their industry or sector, above average ROIC (return on invested capital), and generally at least a 15% return on pre-tax basis over the trailing five years. He is heavily invested in industrials, stating that "I have always been attracted to their free cash flow generation and quality." Typically his investment horizon is three to five years, in line with the timeframe of a typical business cycle.

Royce made a number of moves this past month as reported in his latest 13-G filings. He added Hawkins Inc. (HWKN), Myriad Genetics (MYGN), and Fairchild Semiconductor International Inc. (FCS).

Hawkins Inc. (HWKN)

Royce has held a stake in Hawkins for more than five years, back when the stock traded for under $15 and he held more than 1.25 million shares. In 2008 and 2009, he sold some shares when prices broke over $20 to dip under 800,000 shares, but he recently added 23.63% to his holdings in Hawkins Inc. at an average price of $36.18 to bring his total holdings to 1,139,295 shares. This purchase follows another buying of HWKN stock in the previous quarter.

Hawkins, Inc. is a formulator, manufacturer, blender, distributor, and sales agent for both industrial and reagent grade laboratory chemicals. Primarily operating in the Midwest, Hawkins supplies to pharmacies, water treatment facilities, food and dairy producers, manufacturers, research labs, and many other organizations. It also serves industrial sector customers in the fields of energy, electronics, chemical processing, pulp and paper, and medical devices.

Over the past ten years, Hawkins has shown strong growth at an annual rate of 25.52%, though its revenue per share dropped off in 2010. According to its latest quarterly reports, sales have increased by $24 million since the same period last year. However, net income decreased to under $2 million as compared to $5 million last year due to increased expenses from of the death of its CEO as well as its acquisition of Vertex Chemical Corporation in January. It currently has a P/E ratio of 17.5, slightly above its ten-year average, and its P/S ratio of 1.36 is also above its ten-year average.

Myriad Genetics (MYGN)

Royce previously owned more than 3 million shares of Myriad Genetics when it was traded for under $15. He began selling in 2006 as its price steadily increased to $20 to the point where he owned less than 500,000 shares of MYGN. He finally sold out in the first quarter of 2009 when prices got to as high as $37.85 and just in time: stock prices have taken a tumble back down to around $20 dollars per share. He bought the company again in 2010 and has been adding to his shares every quarter. Most recently, he added146.15% of MYGN at $23.25 to bring his total shares to 8,768,467.

Myriad Genetics, Inc. uses gene-based medicine to develop therapeutic and molecular diagnostic products. It employs a number of proprietary technologies that permit doctors and patients to understand the genetic basis of human disease and the role that genes play in the onset, progression and treatment of disease. This information is used to guide the development of new molecular diagnostic products that assess an individual’s risk for developing disease later in life, identify a patient’s likelihood of responding to a particular drug therapy and tailor a patient’s drug dose to ensure optimal treatment, and assess a patient’s risk of disease progression and disease recurrence.

Myriad Genetics' last quarter statements show that operating income for the first three quarters of fiscal 2011 increased by 19 percent year-over-year to $116 million. Pre-tax income for the quarter also increased by $8 million compared to the same quarter last year, though net income has decreased by $5 million as a result of a $14.4 million income tax expense "recorded for accounting purposes" that the company expects to offset with net operating losses. Peter D. Meldrum, President and CEO of Myriad Genetics, Inc., stated that they "delivered the best revenue and operating income results for any quarter in our history." Myriad Genetics also repurchased 4.5 million shares of its common stock during the quarter. According to its fiscal outlook, Myriad Genetics projects its earnings per share to end between $1.06 and $1.09, tripling the current amount. It recently announced the acquisition of Rules-Based Medicine, diversifying their diagnostics portfolio, and its flagship product, Bracanalysis, has seen strong growth over the past few quarters. It currently has a P/E ratio of 17.22, greater than its 2010 values but lower than its traditional historical value, and a P/S ratio of 5.58 that's near it's ten-year low.

Fairchild Semiconductor International Inc. (FCS)

Like the other two stocks, Royce has had a long term history with Fairchild Semiconductor. In 2006, he began adding to his shares when the stock hovered at around $18. He had almost 9 million shares in 2008, but unfortunately for Royce, the price of FCS began its dramatic fall, bottoming out to as low as $3 per share in the first quarter of 2009. When prices began to rise again, Royce sold more than a third of his shares at an average price of $6.25 and sold another million shares later for an average price of $9.17. Since then, Fairchild Semiconductor has rebounded back to its 2006 price. Royce newly increased his holdings by 112.18% at $17.07 per share, giving him now 11,890,151 total shares of Fairchild Semiconductor.

Fairchild Semiconductor Corporation is a global company solely focused on designing, manufacturing and marketing high performance semiconductors for multiple end market uses. Fairchild's multi-market components are used in computer, telecommunications, automotive, consumer and industrial applications. It supplies logic, analog, mixed signal, non-volatile memory and discrete power and signal technologies solutions to meet the global demand of building block semiconductors.

Fairchild Semiconductor's total revenue increased by $15 million compared to the last quarter though net income decreased by $7.5 million in large part due to an increase in income tax provisions. However, compared to the same quarter the previous year, net income almost doubled. During the past quarter, Fairchild Semiconductor generated $22 million in free cash flow and paid $17 million to acquire the silicon carbide power transistor company TranSiC. After a tremendous spike in P/E in early 2010, its current P/E ratio is now way below its ten-year average at 12.28. P/S ratio is roughly in line with its ten-year average at 1.31.

This is part of GuruFocus Real Time Picks report, which reports the stock trades of Gurus within the last few days. For more information, go to Real Time Picks.


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