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 70 new positions total during the three months ended Dec. 31, it also sold out of 88 stocks and boosted or trimmed a number of other existing investments. The most notable trades included a new position in Louisiana-Pacific Corp. (LPX, Financial), an addition to the H&R Block Inc. (HRB, Financial) stake and a reduction in the Upland Software Inc. (UPLD, Financial) and Rogers Corp. (ROG, Financial) holdings. The Meredith Corp. (MDP, Financial) investment was dissolved following its merger with IAC/InterActiveCorp’s (IAC, Financial) Dotdash.
Louisiana-Pacific
Royce’s firm invested in 358,635 shares of Louisiana-Pacific (LPX, Financial), allocating 0.21% of the equity portfolio to the position. The stock traded for an average price of $68.79 per share during the quarter. It previously sold out of the company in the second quarter of 2021.
The Nashville, Tennessee-based building materials manufacturer has a $6.03 billion market cap and an enterprise value of $5.74 billion; its shares were trading around $69.05 on Tuesday with a price-earnings ratio of 4.85, a price-book ratio of 4.51 and a price-sales ratio of 1.58.
The GF Value Line suggests the stock is fairly valued currently based on its historical ratios, past performance and future earnings projections.
GuruFocus rated Louisiana-Pacific’s financial strength 7 out of 10. In addition to a comfortable level of interest coverage, the company is supported by a robust Altman Z-Score of 9.05 that indicates it is in good standing. The return on invested capital also overshadows the weighted average cost of capital, so value is being created as the company grows.
The company’s profitability scored a 6 out of 10 rating, supported by strong margins and returns on equity, assets and capital that outperform a majority of competitors. It also has a high Piotroski F-Score of 8 out of 9, suggesting operations are healthy, and a predictability rank of one out of five stars. According to GuruFocus, companies with this rank return an average of 1.1% annually over a 10-year period.
Of the gurus invested in Louisiana-Pacific, Royce’s firm now has the largest holding with 0.41% of its outstanding shares. Steven Cohen (Trades, Portfolio), Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Joel Greenblatt (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Lee Ainslie (Trades, Portfolio), Scott Black (Trades, Portfolio) and Caxton Associates (Trades, Portfolio) also own the stock.
H&R Block
With an impact of 0.25% on the equity portfolio, the firm expanded its stake in H&R Block (HRB, Financial) by 349.76%, buying 1.4 million shares. Shares traded for an average price of $24.24 each during the quarter.
The firm now holds a total of 1.8 million shares, which represent 0.32% of the equity portfolio. GuruFocus estimates Royce Investment Partners has lost 1.06% on the investment so far.
The tax preparation services company, which is headquartered in Kansas City, Missouri, has a market cap of $3.99 billion and an enterprise value of $6.3 billion; its shares were trading around $24.37 on Tuesday with a price-earnings ratio of 12.69 and a price-sales ratio of 1.52.
According to the GF Value Line, the stock is fairly valued currently.
H& R Block’s financial strength was rated 3 out of 10 by GuruFocus. As a result of issuing approximately $2.1 billion in new long-term debt over the past three years, the company has poor interest coverage. The Altman Z-Score of 1.86 also indicates it is under pressure since assets are building up at a faster rate than revenue is growing. The ROIC eclipses the WACC, however, so value creation is occurring.
The company’s profitability fared better, scoring a 7 out of 10 rating. Although margins are in decline, returns outperform over half of its industry peers. H&R Block also has a moderate Piotroski F-Score of 5, indicating operations are typical for a stable company, but the one-star predictability rank is on watch due to a slowdown in revenue per share growth and losses in operating income.
With a 1.33% stake, Hotchkis & Wiley is H&R Block’s largest guru shareholder. Other top guru investors are Prem Watsa (Trades, Portfolio), Simons’ firm, John Hussman (Trades, Portfolio), Jeff Auxier (Trades, Portfolio), Ainslie, Mario Gabelli (Trades, Portfolio), Caxton Associates (Trades, Portfolio) and Jones.
Upland Software
Impacting the equity portfolio by -0.53%, Royce’s firm slashed its Upland Software (UPLD, Financial) stake by 87.68%, selling 2.12 million shares. During the quarter, the stock traded for an average per-share price of $25.13.
The firm now holds 297,217 shares total, accounting for 0.04% of the equity portfolio. GuruFocus data shows the firm has lost approximately 38.48% on the investment since it was established in the fourth quarter of 2018.
The Austin, Texas-based software company has a $597.25 million market cap and an enterprise value of $941.89 million; its shares were trading around $19.57 on Tuesday with a price-book ratio of 1.95 and a price-sales ratio of 1.93.
Based on the GF Value Line, the stock appears to be a possible value trap, so potential investors should do thorough research before making a decision.
Upland Software’s financial strength and profitability were both rated 3 out of 10 by GuruFocus. The low Altman Z-Score of 0.48 warns the company could be at risk of bankruptcy since assets are building up and revenue per share has declined over the past 12 months.
The company is also being weighed down by negative margins and returns that underperform a majority of competitors. It has a moderate Piotroski F-Score of 4, however.
The firm is still Upland’s largest guru shareholder with 0.97% of its outstanding shares. Simons’ firm also has a position.
Rogers
The firm trimmed its Rogers (ROG, Financial) stake by 43.31%, or 150,360 shares, impacting the equity portfolio by -0.21%. During the quarter, the stock traded for an average price of $244.94 per share.
Royce Investment Partners, which now holds 196,845 shares of the company, has gained an estimated 71.23% on the long-held investment based on GuruFocus data. The holding represents 0.4% of the equity portfolio.
The manufacturer of specialty engineered materials, which is headquartered in Chandler, Arizona, has a market cap of $5.1 billion and an enterprise value of $4.91 billion; its shares were trading around $272.70 on Tuesday with a price-earnings ratio of 51.26, a price-book 4.65 and a price-sales ratio of 5.62.
The GF Value Line suggests the stock is significantly overvalued currently.
GuruFocus rated Rogers’ financial strength 9 out of 10. In addition to a comfortable level of interest coverage, the robust Altman Z-Score of 14.79 indicates the company is in good standing even though assets are building up at a faster rate than revenue is growing.
The company’s profitability also fared well with an 8 out of 10 rating. Although the operating margin is in decline, returns outperform over half of its industry peers. Rogers also has a high Piotroski F-Score of 7 and a three-star predictability rank as a result of consistent earnings and revenue growth. GuruFocus says companies with this rank return, on average, 8.2% annually.
Barrow, Hanley, Mewhinney & Strauss is Rogers’ largest guru shareholder with 1.78% of its outstanding shares. Simons’ firm also owns the stock.
Meredith
Following its merger with IAC/InterActive’s (IAC, Financial) Dotdash, which closed on Dec. 1, Royce’s position in Meredith (MDP, Financial) was dissolved, impacting the equity portfolio by -0.39%. During the quarter, shares traded for an average price of $58.21 each.
The firm gained an estimated 4.07% on the investment over its lifetime.
Based in New York, the company now known as Dotdash Meredith is America’s largest digital and print publisher. Its brands include People, Better Homes & Gardens, Investopedia and Southern Living.
According to the terms of the deal, the company paid $42.18 per share. The newly combined entity will operate as its own reporting segment within IAC.
Other gurus who benefited from the deal were John Rogers (Trades, Portfolio), Gabelli and Greenblatt.
Additional trades and portfolio performance
During the quarter, the firm also established positions in Bioventus Inc. (BVS, Financial) and Newtek Business Services Corp. (NEWT, Financial), increased its bet on Forward Air Corp. (FWRD, Financial) and curbed its investments in TriState Capital Holdings Inc. (TSC, Financial) and Triumph Bancorp Inc. (TBK, Financial).
Over half of Royce Investment Partners’ $13.38 billion equity portfolio, which was composed of 966 stocks, was invested in the industrials, technology and consumer cyclical sectors, followed by a slightly smaller exposure to the financial services space.
According to the firm’s website, the Royce Premier Fund posted a return of 16.36% in 2021, underperforming the S&P 500 Index’s 28.7% total return.
