Chuck Royce Loads Up on 3 Cyclical Small Caps in 1st Quarter

One of the guru's top buys was Intevac, a supplier of hard drive manufacturing equipment

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Jun 02, 2023
  • Chuck Royce is the founder of Royce Investment Partners, a firm that specialises in small cap stock investing. 
  • Royce loaded up on shares of these 3 cyclical stocks in the 1st quarter of 2023.
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Chuck Royce (Trades, Portfolio) is the investment manager of Royce Investment Partners, formerly Royce & Associates. His investment firm specifically focuses on small-cap stock investing. As Warren Buffett (Trades, Portfolio) once said, “There's more chances for inefficiency” with regards to “less followed companies," which tends to occur with those of the smaller market capitalization basket. Many pension funds also have mandates which only enable investments into large market cap stocks. Therefore, there can be great opportunities in the small-cap space. On the other hand, small-cap stocks can be more volatile both with upswings and downswings, so the level of difficulty is higher for investors.

In this article, we will take a look at three of the firm's notable buys that caught my attention while reading the firm's 12F for the first quarter of 2023; let's dive in.

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.

1. Intevac

Intevac (

IVAC, Financial) was founded in 1991 and is focused on the development of Hard Disk Drive (HDD) manufacturing equipment. According to the company, over 65% of the world’s hard disk output is produced on Intevac’s systems, which is over 50 million disks per month.

The company is a supplier to the two largest hard disk drive manufacturing companies in the world, Seagate and Western Digital, which have approximately 80% of market share combined, according to data from Statista.

Its footprint spans across the world, with a 75,000 square foot research center in Santa Clara, California and manufacturing facilities in China, Malaysia and Singapore, with distribution in Japan.

In terms of a competitive advantage, the company has 120 patents on its technology and is continually innovating.


Cyclical financials

Intevac generated $11.5 million in revenue for the first quarter of 2023, which was at the top end of forecasts and increased by 160% year over year.

This is a positive sign given the computer equipment and semiconductor industry is currently experiencing a cyclical downturn. Many hard drive manufacturers are scaling back capital expenditure and thus this will likely impact Intevac negatively throughout the next year at least.

A positive is in early 2023, the business signed an joint development partnership with a business related to its latest TRIO platform. This includes a five-year period of exclusivity, with around $100 million in sales expected to be generated over that period.

Its operating loss has also improved from $7.5 million in the year-ago quarter to $4.5 million by this past quarter.

1664531082093002752.png IVAC

The business has a strong balance sheet with $68.1 million in cash and short term investments compared to just $4 million in total debt.


Intevac trades at a market cap of ~$118 million, which means it is effectively trading at less than double its net cash position of $64.1 million. Its price-book ratio is 1.01, which is 22% cheaper than its five-year average.

The GF Value chart indicates a fair value of $6.25 per share and thus the stock is “modestly undervalued” at the time of writing.


Insiders such as the CEO, a director and the chief finanical officer have also been buying shares throughout 2023, which is a positive data point.


Mastech Digital

Mastech Digital (

MHH, Financial) was founded in 1986 and is an IT and digital transformation services company headquarted in Pittsburgh, Pennsylvania.

Over the past few years, the company has acquired a number of entities in order to expand its operations. In 2017, the company acquired InfoTrellis, a Canadian IT focused management consulting firm, for $55 million. Then in 2020, the business acquired AmberLeaf Partners, a Chicago-based consulting company focused on customer experience. In that same year, Mastech also launched its MAS-REMOTE service to help its customers hire best in class remote IT consultants.


Mixed financials

Mastech Digital reported $55.1 million in revenue in the first quarter of 2023, which is down 7.35% year over year. Management blamed “economic uncertainty” for the decline. Its Data and Analytics services segment generated $9.4 million in revenue in the quarter, slightly below the $10.2 million reported a year ago.

Its IT Staffing Services segment also reported a decline in its revenue from $49.6 million a yea ago to $45.7 million in the first quarter of 2023. This coincided with a reduction of 84 billable consultants.

Its earnings per share was $0.02, which missed analyst forecasts by $0.15.


A positive is the company has a stable cash position with $9.8 million in cash and short term investments versus $3.4 million in total debt.


Mastech trades at an adjusted (non-GAAP) price-earnings ratio of 10, which is 28.46% cheaper than its five-year average. Its enterprise-value-to-sales ratio is 0.46, which is 46% cheaper than its five-year average.

The GF Value chart indicates a fair value of $19.22 per share and thus the stock is “significantly undervalued” at the time of writing.


Fathom Holdings

Fathom Holdings (

FTHM, Financial) is a real estate technology company that offers platforms to agencies. Its flagship solution is called “IntelliAgent” which offers a “brokerage in a box” solution, allowing agents to list properties, track customers and transactions and much more. The business also offers a solution called “LiveBy,” which is effectively a data aggregation and content creation platform.


Mixed financials

Fathom reported mixed financial results for the first quarter of 2023. Its revenue was $77.5 million, which declined by 13.92% year over year. This may seem terrible at first glance, but keep in mind the housing market is currently going through a cyclical downturn. This has been driven by the rapid increse in housing prices and the rising interest rate environment, which has raised the cost for mortgages. A positive is inflation is on a downward trend and thus one would expect interest rates to fall going forward, which could boost housing prices again given the systemic housing shortage in the U.S.


In addition, Fathom continued to grow its real estate agent network by 18% year over year to 10,628.

In terms of profitability, the company reported an operating loss of $5.5 million in the first quarter of 2023, which was slightly better than the $5.6 million loss reported in the year-ago quarter.


Management has made it a strategic priority to reach adjusted Ebitda breakeven levels by the second quarter of this year and cash flow profitability by the third quarter. The business is implementing a cost cutting plan to improve its cost structure overall. This is a positive sign given the company has $6.7 million in cash and short term investments on its balance sheet compared to $11.3 million in total debt.


Fathom trades at a price-sales ratio of 0.24, which is 94% cheaper than its five-year average.


The GF Value chart indicates a fair value of $22 per share but does warn of a possible “value trap." Personally, I don't think this will be an issue if management can meet its breakeven target.


Final thoughts

The three small cap stocks in this list are all picks from small-cap expert

Chuck Royce (Trades, Portfolio) that are experiencing near-term challenges. A positive is a cyclical decline can often provide opportunities for value. Out of the three stocks on this list, my favorite is Intevac due to its 20-year relationship with hard drive manufacturers and new products coming online. The insider buying is also a positive data point, and its balance sheet is extremely strong. The other two stocks are ok businesses, but I don't like how weak their balance sheets are.

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I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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