While 2022 has been a rough year in the markets, Royce Investment Partners has plenty of reasons to celebrate on its 50th anniversary.
The New York-based firm, headed by renowned investor Chuck Royce (Trades, Portfolio), 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.
In a commentary published earlier this week, the guru, who took the helm of what is now the Royce Pennsylvania Mutual Fund in November of 1972, reflected on the past five decades. Discussing some of the things that have changed in that time, the pioneer in small-cap investing noted the most significant is “how the asset class has evolved.”
“Small-cap has gone from being obscure and misunderstood to an established and institutionally recognized asset class,” he said. “When I began my career as an analyst, small-cap was not seen as an asset class of its own—that is, one that had its own distinctive investment attributes, performance patterns, etc. To the degree that it was recognized, investors saw it as the place you went to find one or maybe a few highly risky growth stocks. With Penn, I was trying to do something innovative that went against the current.”
That strategy appears to have been successful as, on its website, the firm disclosed the Pennsylvania Mutual Fund has posted an average annual total return of 12.18% over the past 45 years. It has also outperformed its benchmark index, the Russell 2000, for the year to date, one-year, three-year, five-year, 20-year and 30-year periods as of Sept. 30.
With geopolitical conflicts, rampant inflation and rising interest rates creating uncertainty around the world, it is unsurprising that some of the firm’s top holdings have underperformed both the Russell 2000 and the S&P 500 indexes this year while others have soared.
The firm’s $8.84 billionequity portfolio consisted of 931 stocks as of Sept. 30. The 13F filing showed the portfolio was heavily invested in industrials stocks at 29.43%, while the technology sector has a weight of 18.65% and the consumer defensive space represents 13.48%.
As of the end of the third quarter, Royce’s five largest holdings were Arcosa Inc. (ACA, Financial), Kennedy-Wilson Holdings Inc. (KW, Financial), Innospec Inc. (IOSP, Financial), Kadant Inc. (KAI, Financial) and Valmont Industries Inc. (VMI, Financial).
Investors should be aware that 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Arcosa
Representing 1.12% of the equity portfolio, Arcosa (ACA, Financial) is the firm’s largest holding. GuruFocus estimates it has gained 54.02% on the long-held investment.
With a return of 7.77%, the Dallas-based company has outperformed the S&P 500 and the Russell 2000, which are both down more than 20%, by a wide margin this year.
The construction engineering company, which provides infrastructure-related products and services, has a $2.81 billion market cap and an enterprise value of $3.43 billion; its shares were trading around $57.71 on Thursday with a price-earnings ratio of 28.32, a price-book ratio of 1.38 and a price-sales ratio of 1.24.
The GF Value Line suggests the stock is fairly valued currently based on historical ratios, past financial performance and analysts’ future earnings projections.
While the company has reported stronger demand in some of its business segments this year, it has had to offset the impacts of inflationary pressure. Further, the passage of the Inflation Reduction Act in August, which includes spending on infrastructure projects, is expected to be a catalyst for its wind towers business.
Of the gurus invested in Arcosa, Royce’s firm has the largest stake with 3.59% of its outstanding shares. Yacktman Asset Management (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and First Eagle Investment (Trades, Portfolio) also own the stock.
Kennedy-Wilson
Accounting for 1.03% of the equity portfolio, Kennedy-Wilson (KW, Financial) is the firm’s second-largest holding. GuruFocus says it has gained approximately 27.06% on the investment since the fourth quarter of 2009.
Posting a return of -31.12% year to date, the real estate company, which is headquartered in Beverly Hills, California, is underperforming both indexes.
The company, which focuses on multifamily and commercial properties, has a market cap of $2.31 billion and an $8.07 billion enterprise value; its shares were trading around $16.67 on Thursday with a price-earnings ratio of 38.11, a price-book ratio of 1.73 and a price-sales ratio of 4.45.
According to the GF Value Line, the stock is fairly valued currently.
Like the rest of the real estate sector, Kennedy-Wilson’s stock performance has likely been impacted by rising interest rates and general unease in the markets, leading to a slowdown. According to the National Association of Realtors, overall demand for office space is lower compared to previous quarters even as more people have headed back to the office following the Covid-19 pandemic. However, demand for apartments and other multifamily housing remains relatively strong.
With a 9.67% stake, Prem Watsa (Trades, Portfolio) is Kennedy-Wilson’s largest guru shareholder. Royce is second with 4.26% of its outstanding shares. Arnold Van Den Berg (Trades, Portfolio) also has a small position.
Innospec
With 1.01% space in the equity portfolio, Innospec (IOSP, Financial) is Royce’s third-largest stake. GuruFocus data shows it has gained an estimated 25.19% on the investment over its lifetime.
Returning 14.14%, the Littleton, Colorado-based specialty chemical company has outperformed both indexes so far this year.
The company, which produces polyethylene wax along with other chemicals, additives and formulations for a wide range of industries, has a $2.66 billion market cap and an enterprise value of $2.45 billion; its shares were trading around $107.15 on Thursday with a price-earnings ratio of 23.04, a price-book ratio of 2.49 and a price-sales ratio of 1.55.
Based on the GF Value Line, the stock appears to be fairly valued currently.
Despite supply chain disruptions and energy concerns in Europe, Innospec has managed to beat on its earnings estimates for the past four quarters. In its third-quarter financial report, which was released on Wednesday, the company recorded sales increases across its three business segments compared to the prior-year period.
Royce’s firm is the company’s largest guru shareholder with a 4.23% stake. Other top guru investors are Hotchkis & Wiley, Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Paul Tudor Jones (Trades, Portfolio) and Jeremy Grantham (Trades, Portfolio).
Kadant
Occupying 0.95% of the equity portfolio, Kadant (KAI, Financial) is the fourth-largest position. GuruFocus found the firm has gained approximately 107.20% on the long-held investment.
Achieving a year-to-date return of -17.31%, the industrial company headquartered in Westford, Massachusetts has slightly outperformed the S&P 500 and Russell 2000.
The company, which supplies process and engineering equipment for a number of industries, has a market cap of $2.19 billion and a $2.33 billion enterprise value; its shares were trading around $188.36 on Thursday with a price-earnings ratio of 23.98, a price-book ratio of 3.60 and a price-sales ratio of 2.47.
The GF Value Line suggests the stock is fairly valued currently.
Although the company has continued to struggle with “increasingly complex market conditions,” including inflation, a strong U.S. dollar, lingering supply chain constraints and China’s Covid-19 policy, Kadant managed to record growth in both revenue and net income during the third quarter. Bookings, however, decreased 14% to $211 million. The company also issued guidance for the fourth quarter that was significantly below what some analysts were projecting.
Of the gurus invested in Kadant, Royce has the largest holding with 4.30% of its outstanding shares. Grantham, Simons’ firm and Joel Greenblatt (Trades, Portfolio) also have positions in the stock.
Valmont Industries
Coming in at number five, Valmont Industries (VMI, Financial) makes up 0.93% of Royce’s equity portfolio. GuruFocus research shows the firm has gained an estimated 50.95% on the investment.
Returning 29.84% for the year so far, the Omaha, Nebraska-based industrial manufacturing company has significantly outperformed both indexes.
The company, which produces Valley center pivot and linear irrigation equipment, windmill support structures and lighting, traffic and utility poles, has a $6.92 billion market cap and an enterprise value of $7.85 billion; its shares were trading around $324.37 on Thursday with a price-earnings ratio of 29.43, a price-book ratio of 4.58 and a price-sales ratio of 1.69.
According to the GF Value Line, the stock is modestly overvalued currently.
Having posted record sales for the third quarter in October, the company’s strong performance can be attributed to the high global demand for its products in both the infrastructure and agriculture markets. It should benefit further from the Inflation Reduction Act as more investments are made in updating infrastructure to accommodate clean energy initiatives.
With 1.44% of its outstanding shares, Royce’s firm is the company’s largest guru shareholder. Other guru investors are Gabelli, Grantham, Murray Stahl (Trades, Portfolio), Greenblatt and Jones.
