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Margaret Moran
Margaret Moran
Articles (448) 

Top 1st-Quarter Buys of Chuck Royce's Firm

Small-cap investing firm releases portfolio update

Royce Investment Partners recently released its portfolio update for the first quarter of 2020, in which it established 87 new positions for a turnover rate of 8%. The firm’s fiscal quarter ended on March 31.

Renamed from Royce & Associates at the end of 2019, Royce Investment Partners is the investment firm founded by Chuck Royce (Trades, Portfolio) in 1972. The firm specializes in small-cap companies, which it chooses through a bottom-up, risk-conscious approach. The portfolio managers focus on quality and deep value through a variety of open-end and closed-end funds.

Based on the above-listed criteria, the firm’s top five new buys for the recent quarter were ESCO Technologies Inc. (NYSE:ESE), PulteGroup Inc. (NYSE:PHM), Everbridge Inc. (NASDAQ:EVBG), e.l.f. Beauty Inc. (NYSE:ELF) and OneWater Marine Inc. (NASDAQ:ONEW).

ESCO Technologies

The firm bought 447,118 shares of ESCO Technologies after selling out of its previous holding in the company in the second quarter of 2013. The trade had a 0.46% impact on the equity portfolio. During the quarter, shares traded for an average price of $91.63.

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ESCO Technologies is a hardware engineering company based in St. Louis. It manufactures engineered products and solutions for industries with high growth prospects, including the aerospace, defense and industrial markets.

On May 13, shares of ESCO traded around $75.10 for a market cap of $1.96 billion and a price-earnings ratio of 13.14. According to the Peter Lynch chart, the stock may be overvalued.

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GuruFocus gives the company a financial strength rating of 7 out of 10 and a profitability rating of 7 out of 10. The cash-debt ratio of 0.61 is lower than 66.29% of competitors, but the Altman Z-Score of 4.1 suggests that the company is not in danger of bankruptcy. With an operating margin of 13.72%, the company has grown its revenue and net income steadily in recent years.

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PulteGroup

The firm also invested in 470,658 shares of PulteGroup after selling out of its previous holding in the company in the fourth quarter of 2019. The trade impacted the equity portfolio by 0.14%. Shares traded for an average price of $38.80 during the quarter.

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PulteGroup is a home construction company that builds in 23 of the states in the U.S. Based in Atlanta, it is the third-largest U.S. homebuilder by number of homes closed. It is also the only national builder that pre-wires all new houses for increased Wi-Fi coverage.

On May 13, shares of PulteGroup traded around $27.15 for a market cap of $7.74 billion and a price-earnings ratio of 7.09. The Peter Lynch chart suggests that the stock is trading below its intrinsic value.

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GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rating of 8 out of 10. The cash-debt ratio of 0.59 is higher than 62.39% of competitors, while the Altman Z-Score of 3.24 indicates financial stability. As shown in the chart below, the return on invested capital is approximately three times the weighted average cost of capital, while the operating margin is also high at 13.38%.

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Everbridge

After selling out of its previous holding in Everbridge in the third quarter of 2019, the firm bought 70,700 new shares, impacting the equity portfolio by 0.10%. During the quarter, shares traded for an average price of $97.58.

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Everbridge is an enterprise software company that delivers emergency notification communications via phone, text message and email. Areas of operation include medical emergencies, equipment failures, IT incident response and severe weather. The company is headquartered in Burlington, Massachusetts.

On May 13, shares of Everbridge traded around $158.95 for a market cap of $5.46 billion. According to the Peter Lynch chart, the stock may be overvalued. The company has not yet had a profitable year since going public, though revenue has steadily increased.

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GuruFocus gives the company a financial strength rating of 4 out of 10 and a profitability rating of 3 out of 10. The cash-debt ratio of 1.14 is lower than 61.82% of competitors, but the Altman Z-Score of 5.32 suggests that the company is not likely to go bankrupt. According to the chart below, the operating margin, net margin, return on equity and return on assets have decreased slightly over time.

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e.l.f. Beauty

The firm established a new position worth 607,000 shares in e.l.f. Beauty, impacting the equity portfolio by 0.08%. During the quarter, shares traded for an average price of $15.10.

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California-based e.l.f. Beauty is the owner of its namesake cosmetics brand. The company offers innovative, professional-quality, cruelty-free makeup for similar prices to drugstore brands.

On May 13, shares of e.l.f. Beauty traded around $12.85 for a market cap of $648.96 million. The price-book ratio of 2.67 and price-sales ratio of 2.35 are lower than 79.31% of other companies in the industry.

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GuruFocus gives the company a financial strength rating of 5 out of 10 and a profitability rating of 4 out of 10. The cash-debt ratio of 0.5 is above the industry median of 0.39, but the Altman Z-Score of 1.33 warns that the company could be in danger of bankruptcy. The operating margin of 15.96% is more than three times the industry median of 4.64%. Revenue and net income are both strongly cyclical throughout the calendar year, but the general trend of both has been upward.

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OneWater Marine

The firm also made a new investment of 743,457 shares in OneWater Marine, which had a 0.08% impact on the equity portfolio. Shares traded for an average price of $11.81 during the quarter.

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OneWater Marine is a boat dealer headquartered in Buford, Georgia. Founded in 2014, the company went public in 2020. It sells new and pre-owned boats, boat parts and accessories, insurance, insurance and repair and maintenance services.

On May 13, shares of OneWater Marine traded around $12.52 for a market cap of $182.17 million and a price-earnings ratio of 3.35. The price-book ratio of 1.33 is high for the industry, but the price-sales ratio of 0.12 is lower than 90.27% of other companies in the industry.

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GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rating of 4 out of 10. The cash-debt ratio of 0.05 is lower than 93.96% of competitors, while the interest coverage ratio of 2.9% also indicates low liquidity. The operating margin is 6.64% and the return on capital is 19.3%, both higher than the industry medians.

Portfolio overview

As of the quarter’s end, the firm’s equity portfolio consisted of 1,149 stocks valued at $7.34 billion. The top holdings were Quaker Chemical Corp. (NYSE:KWR) with 1.32% of the equity portfolio, Ares Management Corp. (NYSE:ARES) with 1.17% and MKS Instruments Inc. (NASDAQ:MKSI) with 1.14%.

In terms of sector weighting, the firm was most invested in industrials (28.41%), technology (21.71%) and financial services (14.62%).

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Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Portfolio updates reflect only common stock positions as per the regulatory filings for the quarter in question and may not include changes made after the quarter ended.

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