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Sydnee Gatewood
Sydnee Gatewood
Articles (2594) 

Chuck Royce's Firm Reveals Top Trades of the 2nd Quarter

Canadian asset manager is small-cap specialist's largest new position

Royce Investment Partners disclosed its equity trades for the second quarter this week.

Founded in 1972 by Chuck Royce (Trades, Portfolio), the New York-based firm specializes in small-cap companies. The portfolio management team picks stocks based on an active, bottom-up, risk-conscious and fundamental approach. They also search for value opportunities among companies trading at a discount to enterprise value.

While the firm established 120 new positions total during the quarter, notable trades included a new stake in Sprott Inc. (NYSE:SII), additions to the Home BancShares Inc. (NASDAQ:HOMB) and Watsco Inc. (NYSE:WSO) holdings and reductions to the Air Lease Corp. (NYSE:AL) and Franklin Electric Co. Inc. (NASDAQ:FELE) positions.

Sprott

Royce's firm invested in 1.37 million shares of Sprott, allocating 0.54% of the equity portfolio to the stake. The stock traded for an average price of $25.84 per share during the quarter.

The Canadian asset management company has a $945.2 million market cap and an enterprise value of $906.75 million; its shares were trading around $38.86 on Tuesday with a price-earnings ratio of 129.86, a price-book ratio of 5.01 and a price-sales ratio of 15.68.

The Peter Lynch chart shows the stock is trading above its fair value, suggesting it is overpriced. The GuruFocus valuation rank of 1 out of 10 also supports this assessment since the share price and price ratios are near multiyear highs.

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GuruFocus rated Sprott's financial strength 8 out of 10, driven by adequate interest coverage and a robust Altman Z-Score of 11.79. The weighted average cost of capital also surpasses the return on invested capital, indicating that the company will destroy value as it grows.

The company's profitability did not fare as well, scoring a 5 out of 10 rating even though its operating margin and returns outperform at least half of competitors. Sprott also has a moderate Piotroski F-Score of 5, which implies business conditions are stable. Although revenue has been in decline for the past five years, the company has a predictability rating of one out of five stars. According to GuruFocus, companies with this rank typically return an average of 1.1% annually over a 10-year period.

The firm has a 5.43% stake in Sprott. No other gurus currently own the stock.

Home BancShares

With an impact of 0.22% on the equity portfolio, the firm expanded its stake in Home Bancshares by 30,104.95%. Shares traded for an average price of $14.01 each during the quarter.

The firm now holds a total of 1.27 million shares, which represent 0.22% of the equity portfolio. GuruFocus estimates Royce Investment Partners has gained 27.12% on the investment establishing it in the first quarter of 2019.

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The Conway, Arkansas-based company, which operates as Centennial Bank, has a market cap of $3.06 billion and an enterprise value of $2.74 billion; its shares were trading around $18.49 on Tuesday with a price-earnings ratio of 14.3, a price-book ratio of 1.2 and a price-sales ratio of 4.52.

According to the Peter Lynch chart, the stock is trading close to its fair value. The GuruFocus valuation rank of 5 out of 10 aligns with this analysis.

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Home BancShares' financial strength was rated 3 out of 10 by GuruFocus even though the cash-debt ratio of 1.35 is outperforming versus its industry and history. Since its assets are building up at a faster rate than its revenue is growing, the company may be becoming less efficient. In addition, the WACC significantly outweighs the ROIC, suggesting poor profitability.

The company's profitability scored a 5 out of 10 rating on the back of margins and returns that outperform at least half of its industry peers. Home BancShares also has a moderate Piotroski F-Score of 5 and a one-star predictability rank.

With 0.77% of outstanding shares, Royce's firm is the company's largest guru shareholder. Other top guru investors are Hotchkis & Wiley, Robert Olstein (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Pioneer Investments (Trades, Portfolio).

Watsco

Impacting the equity portfolio by 0.2%, Royce's firm boosted its Watsco position by 455.38%, buying 105,417 shares. During the quarter, the stock traded for an average per-share price of $165.32.

The firm now holds 128,566 shares total, which account for 0.25% of its total assets managed. GuruFocus data shows the firm has gained approximately 46.44% on the investment since it was established in the fourth quarter of 2017.

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The HVAC company, which is headquartered in Florida, has a $9.21 billion market cap and an enterprise value of $9.69 billion; its shares were trading around $240.68 on Tuesday with a price-earnings ratio of 39.78, a price-book ratio of 6.41 and a price-sales ratio of 1.74.

Based on the Peter Lynch chart, the stock appears to be overvalued. The GuruFocus valuation rank of one out of 10 also leans toward overvaluation since the share price and price ratios are near 10-year highs.

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Watsco's financial strength and profitability were both rated 7 out of 10 by GuruFocus. In addition to comfortable interest coverage, the company is supported by a high Altman Z-Score of 9.17. The ROIC is also more than double the WACC, suggesting good profitability.

The company also has strong margins and returns that outperform a majority of competitors as well as a moderate Piotrsoki F-Score of 4. The one-star predictability rank, however, is on watch.

Tom Gayner (Trades, Portfolio) is Watsco's largest guru shareholder with 1.03% of outstanding shares. Jim Simons (Trades, Portfolio)' Renaissance Technologies, Steven Cohen (Trades, Portfolio), Jones, Joel Greenblatt (Trades, Portfolio) and Pioneer also own the stock.

Air Lease

The firm trimmed its Air Lease stake by 29.92%, or 726,956 shares, impacting the equity portfolio by -0.22%. During the quarter, the stock traded for an average price of $26.62 per share.

The firm, which now holds 1.7 million shares of the company, has gained an estimated 6.55% on the investment since the second quarter of 2012 based on GuruFocus data. The holding represents 0.55% of the total assets managed.

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The Los Angeles-based aircraft leasing company has a market cap of $3.6 billion and an enterprise value of $17.32 billion; its shares were trading around $31.76 on Tuesday with a price-earnings ratio of 6.18, a price-book 0.62 and a price-sales ratio of 1.73.

The Peter Lynch chart suggests the stock is undervalued.

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GuruFocus rated Air Lease's financial strength 3 out of 10. As a result of issuing $5.5 billion in new long-term debt over the past three years, the company has weak interest coverage. The low Altman Z-Score of 0.69 warns the company could be in danger of going bankrupt. In addition, it may be becoming less efficient since its assets are building up at a faster rate than its revenue is growing.

The company's profitability fared better, scoring a 7 out of 10 rating on the back of strong margins and returns on equity and assets that outperform at least half of their industry peers. Air Lease also has a moderate Piotroski F-Score of 5.

Royce's firm has the largest position in the stock with 1.5% of outstanding shares. Ron Baron (Trades, Portfolio), the Signature Select Canadian Fund (Trades, Portfolio) and John Hussman (Trades, Portfolio) are also shareholders.

Franklin Electric

Royce Investment Partners curbed its holding of Franklin Electric by 79.34%, or 319,107 shares. The trade had an impact of -0.21% on the equity portfolio. During the quarter, shares traded for an average price of $49.65 each.

Now holding a total of 83,100 shares, which account for 0.05% of the equity portfolio, GuruFocus estimates the firm has gained 148.65% on the investment since the second quarter of 2009.

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Headquartered in Fort Wayne, Indiana, the company, which manufactures submersible pumps, electric motors and components for fueling systems and center pivot irrigation systems, has a $2.81 billion market cap and an enterprise value of $2.9 billion; its shares were trading around $60.79 on Tuesday with a price-earnings ratio of 32.33, a price-book ratio of 3.65 and a price-sales ratio of 2.3, which GuruFocus notes are all near 10-year highs.

According to the Peter Lynch chart and GuruFocus valuation rank of 2 out of 10, the stock is overvalued.

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Franklin Electric's financial strength was rated 7 out of 10 by GuruFocus on the back of comfortable interest coverage and a high Altman Z-Score of 7.09.

Boosted by returns that outperform a majority of competitors, the company's profitability scored an 8 out of 10 rating. Although the operating margin is in decline and revenue per share has declined over the past year, Franklin Electric also has a moderate Piotroski F-Score of 6 and a three-star predictability rank. GuruFocus says companies with this rank typically return an average of 8.2% annually.

Of the gurus invested in Franklin Electric, Gabelli has the largest holding with 0.63% of outstanding shares. Other top guru shareholders include Cohen, Greenblatt and Pioneer.

Additional trades and portfolio composition

Other stocks the firm established positions in during the quarter included Signature Bank (NASDAQ:SBNY), Renaissance Holdings Ltd. (NYSE:RNR), Compass Diversified Holdings (NYSE:CODI), Axis Capital Holdings Ltd. (NYSE:AXS) and Bristow Group Inc. (NYSE:VTOL).

Nearly half of Royce Investment Partners' $9.08 billion equity portfolio, which is composed of 1,179 stocks, is invested in the industrials and technology sectors, followed by smaller holdings in the financial services and consumer cyclical spaces.

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According to the firm's website, the Royce Premier Fund returned 34.13% in 2019, outperforming both the S&P 500 Index's return of 31.49% and the Russell 2000's 25.52% return.

Disclosure: No positions.

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About the author:

Sydnee Gatewood
I am the editorial director at GuruFocus. I have a BA in journalism and a MA in mass communications from Texas Tech University. I have lived in Texas most of my life, but also have roots in New Mexico and Colorado. Follow me on Twitter! @gurusydneerg

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bigoocare
Bigoocare - 1 month ago    Report SPAM

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