Royce Investment Partners has revealed its portfolio for the third quarter, including several large reductions in holdings. These reductions include Ares Management Corp. (ARES, Financial), Scholastic Corp. (SCHL, Financial), Tennant Co. (TNC, Financial), BMC Stock Holdings Inc. (BMCH, Financial) and Quaker Chemical Corp. (KWR, Financial).
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.
At the end of the quarter, the portfolio contained 989 stocks, with 57 new holdings. It was valued at $9.27 billion and has seen a turnover rate of 8%. Top holdings include MKS Instruments Inc. (MKSI, Financial), Quaker Chemical, Colfax Corp. (CFX, Financial), Mesa Laboratories Inc. (MLAB, Financial) and Lindsay Corp. (LNN, Financial).
By weight, the top three sectors represented are industrials (27.06%), technology (22.42%) and financial services (13.71%).
The biggest impact to the firm's portfolio came from a reduction in the holding of Ares Management. The firm sold an additional 921,721 shares to slim the holding down by an additional 36.94%. During the quarter, the shares traded at an average price of $39.92. Overall, the sale had an impact of -0.40% on the portfolio and GuruFocus estimates the total gain of the holding at 111.65%.
Ares Management is an asset management company based in the United States. It offers investors with investment-related advice and strategies for capital growth. Its business is organized into three business lines, namely Credit Group, Private Equity Group and the Real Estate Group.
On Nov. 25, the stock was trading at $44.84 per share with a market cap of $6.47 billion. According to the GF Value Line, the stock is significantly overvalued.
GuruFocus gives the company a financial strength rating of 3 out of 10 and a profitability rank of 6 out of 10. There are currently five severe warning signs issued, including extremely low interest coverage and poor financial strength. The company has seen debt more than double since 2016, placing it in a distressed financial situation as indicated by an Altman Z-Score of 0.51.
Scholastic saw one of the firm's most drastic reductions in a holding during the quarter as it was cut by 70.41%. The firm sold 805,300 shares, which traded at an average price of $24.54 during the quarter. GuruFocus estimates the total gain of the holding at 15.01% and the sale had an overall impact of -0.27% on the portfolio.
Scholastic is an American publishing and education media company that focuses on books and educational material for schools, teachers, parents and children. The company is one of the world's largest publishers of children's books and also owns the exclusive rights to various books, including "Harry Potter" and "The Hunger Games." Some of the company's original titles include "Clifford the Big Red Dog," "Goosebumps" and "The Magic School Bus."
As of Nov. 25, the stock was trading at $24.62 per share with a market cap of $848.87 million. The GF Value Line gives the company a significantly undervalued rating.
GuruFocus gives the company a financial strength rating of 6 out of 10, a profitability rank of 5 out of 10 and a valuation rank of 7 out of 10. There are currently two severe warning signs issued for declining gross margin percentage and revenue per share. Cash flows have fallen into negative values for 2020.
The firm's holding in Tennant was cut by 37.97% with the sale of 365,086 shares. The shares traded at an average price of $66.13 during the quarter. Overall, the sale had an impact of -0.26% on the portfolio and GuruFocus estimates the total gain of the holding at 105.83%.
Tennant is a manufacturer of floor cleaning equipment, wood flooring and wood products. It operates in three geographic business units, including the Americas, Europe, the Middle East and Africa and the Asia Pacific region. The company offers products and solutions consisting of mechanized cleaning equipment, detergent-free and other sustainable cleaning technologies, aftermarket parts and consumables, equipment maintenance and repair service, specialty surface coatings and business solutions such as financing, rental and leasing programs and machine-to-machine asset management solutions.
Nov. 25 saw the stock trading at $69.75 per share with a market cap of $1.29 billion. The GF Value Line shows the company trading at modestly overvalued pricing.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 6 out of 10. There are currently three severe warning signs issued for assets growing faster than revenue and declining gross margin and operating margin percentages. The return on invested capital supports the weighted average cost of capital, which will allow value to grow alongside the business.
BMC Stock Holdings
BMC Stock Holdings, a relatively short-term holding for the firm, was also cut down to size during the third quarter. The holding was reduced by 66.15% with the sale of 779,133 shares. The shares traded at an average price of $32.89 during the quarter. The sale had a -0.22% impact on the portfolio and GuruFocus estimates the total gain of the holding at 39.30%.
BMC Stock Holdings is a diversified lumber and building materials distributor and solutions provider. Its primary products are lumber and lumber sheet goods, millwork, doors, flooring, windows and structural components. The company offers services such as lock keying, decking and docking, cabinet specialists, showroom and design centers and window and door replacement. It sells its products under the brand name Metrie, Huber, Trex, James Hardie and Jeld-Wen.
On Nov. 25, the stock was trading at $48.33 per share with a market cap of $3.26 billion. The GF Value Line gives the company a significantly overvalued rating.
GuruFocus gives the company a financial strength rating of 6 out of 10 and a profitability rank of 6 out of 10. There is currently one severe warning sign issued for assets growing faster than revenue. Revenue dipped in 2019 despite seeing consistent growth over the last decade.
A top holding in the portfolio, Quaker Chemical was cut by 13.72% during the quarter. The 94,798 shares that were sold traded at an average price of $191.94 during the quarter. GuruFocus estimates the firm has gained 236.38% on the holding and the sale had an impact of -0.19% on the portfolio overall.
Quaker Chemical manufactures and sells a variety of chemicals and chemical-based products. The company's product portfolio includes rolling lubricants, machining and grinding compounds and corrosion preventives that are used by steel and aluminum manufacturers. Quaker Chemical also sells hydraulic fluids used to operate hydraulic equipment, bio-lubricants used by the forestry and construction industries and chemical milling maskants for the aerospace industry.
As of Nov. 25, the stock was trading at $250.18 per share with a market cap of $4.46 billion. The GF Value Line gives the stock a modestly overvalued rating.
GuruFocus gives the company a financial strength rating of 5 out of 10, a profitability rank of 7 out of 10 and a valuation rank of 1 out of 10. There are currently two severe warning signs issued for assets growing faster than revenue and a Sloan ratio showing poor quality of earnings. Debt saw a massive spike in 2019 and brought the cash-to-debt ratio to 0.17, lower than 82.97% of competitors.
Disclosure: Author owns no stocks mentioned.
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