Royce Investment Partners recently released its 13F portfolio updates for the third quarter of 2022, which ended on Sept. 30.
Previously known as Royce & Associates, the firm changed its name to Royce Investment Partners in 2019. It was founded by Chuck Royce (Trades, Portfolio) in 1972. The firm specializes in small-cap companies, choosing investments through a bottom-up, risk-conscious approach. The portfolio managers focus on quality and deep value stocks.
Based on the firm’s latest 13F filing for the third quarter, its top new buy was for Kyndryl Holdings Inc. (KD, Financial), IBM’s (IBM, Financial) infrastructure business that it spun off last year in an attempt to get the slow-growing unit off its earnings numbers. The firm also added to existing holdings in retailers Carter's Inc. (CRI, Financial) and Enovis Corp. (ENOV, Financial).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Kyndryl Holdings Inc.
Royce’s firm took a stake worth 2,126,158 shares in Kyndryl Holdings Inc. (KD, Financial), giving it a 0.20% weight in the equity portfolio and marking its top new holding for the quarter. Throughout the quarter, shares averaged $10.40 apiece.
New York-based Kyndryl is a provider of information technology infrastructure services. It designs, builds, manages and modernizes large-scale information systems for key industries such as banking, health care, insurance and media.
Kyndryl used to be part of IBM (IBM, Financial) but was spun off so that IBM could focus more on growing its hybrid cloud platform and artificial intelligence capabilities and attract higher valuation multiples for IBM stock. While Kyndryl’s managed infrastructure support services still have a large market, this legacy business’ growth has been too slow for IBM’s liking.
As one might expect, IBM’s investors were eager to dump the new spinoff, causing shares to crash from an initial price of $31.50 to just $8.02 as of this writing. The company is not profitable according to its financial data, but its price-sales ratio of 0.1 is dirt cheap.
However, one thing most investors are ignoring is the fact that without the tether to IBM, Kyndryl is now able to pursue deals with its parent company’s direct competitors, which effectively more than doubles its total addressable market. It is already the largest player in the managed infrastructure space, which should help it implement its aggressive expansion plan.
Carter's Inc.
The firm boosted its Carter's Inc. (CRI, Financial) holding by 282,095 shares for a total position of 445,045, adding 0.21% to the equity portfolio. Shares traded for an average price of $76.58 for the quarter.
Carter’s is an American children’s apparel company based in Atlanta, Georgia. It sells its products through Carter’s and OshKosh B’gosh retail stores, as well as through its online channel.
For a retailer, Carter’s is fairly efficient from an operation perspective, with an operating margin of 14.26% and a net margin of 9.74%, both of which outperform more than 78% of industry peers and didn’t even drop into the negatives for full-year 2020 during the Covid lockdowns. It has been profitable in 10 out of the past 10 years.
With a price-earnings ratio of 9.89, which is only slightly higher than its three-year earnings per share without non-recurring items growth rate of 9.2%, Carter’s earnings a rating of significantly undervalued from the GF Value chart:
This stock appears to be a classic example of investors throwing the baby out with the bathwater. As a retailer, Carter’s will undeniably face near-term pressure due to inflation and the worsening economic situation, but in the long-term, this company’s solid operational structure and best-in-class brands should allow it to recover well.
Enovis Corp
The firm also added another 363,928 shares to its position in Enovis Corp. (ENOV, Financial) for a total of 989,227 shares, impacting the equity portfolio by 0.19%. Shares changed hands for an average of $54.21 in the quarter.
Formerly known as Colfax, Enovis is a medical technology company that focuses on orthopedics for an active lifestyle. It offers things like hip implants, spine bracing, ankle plating, knee implants, bone growth stimulation and so on.
The company recently completed its spinoff of ESAB Corp. (ESAB), a fabrication technology business that it had first acquired back in 2012. ESAB operates in the industrial products industry, focusing on welding, consumables, specialty gas control, robotics and digital solutions.
When the original 2012 acquisition occurred, Colfax was trying to create a diversified technology conglomerate, but things changed for the business after the 2019 acquisition of orthopedic solutions leader DJO. As the medical technology business grew, it eventually made sense for the two very different businesses to separate.
It's tough to value Enovis after the recent business split. Judging from the company’s quarterly and annual reports, it looks like Enovis will be a lower-margin business than ESAB, but the company is guiding for high-single-digit growth as well as improving margins as it expands its innovation pipeline.
Portfolio overview
As of the quarter’s end, the equity portfolio contained 931 stocks valued at a total of $8.84 billion as per the 13F filing. Turnover for the quarter was 7%.
The top holding as of the quarter’s end was Arcosa Inc. (ACA) with a weight of 1.12% in the equity portfolio, followed by Kennedy-Wilson Holdings Inc. (KW) with 1.03% and Innospec Inc. (IOSP) with 1.01%.
Portfolio weighting statistics show that Royce Investment Partners has allocated the biggest portions of its portfolio to industrials, technology and consumer cyclical stocks.
