Earnings Predictability is one of the most important factors when determining intrinsic value (i.e. fair value) and is the basis for the following article. By themselves, earnings multiples are important, but without the ability to accurately predict a company's future profits then the price you pay becomes much less important. To that note this article takes a look at some predictable companies from Chuck Royce.
As you know, Chuck Royce is the Co-Chief Investment Officer of Royce & Associates LLC, which manages The Royce Funds. The company was acquired in 1972 by Mr. Royce and became a wholly owned, independent subsidiary of Legg Mason, Inc. in October 2001. As of March 31, 2010 the investment advisor managed $28.31 billion and was invested in 1512 stocks. The Royce Funds includes 26 open-end mutual funds, three closed-end funds and two open-end mutual funds offered to variable annuity and variable life insurance companies. In each portfolio they pay close attention to risk and maintaining their discipline, regardless of market movements and trends.
Chuck Royce is one of the pioneers of small-cap investing, and uses value investing strategies to find small cap stocks. These companies are defined as being less market capitalizations under $2.5 billion with MicroCaps being $500 million and under. He's also stepped up his investments into Mid-Cap stocks with less than $10 billion.
He seeks absolute returns and focuses on these smaller companies that meet his value investing philosophy. Using this philosophy, he views sustainable returns as one of the most important factor when looking at the "numbers" and keeps a keen eye on the debt when investing into any business. The fund manager also holds no more than 100 securities at any one time and invests up to 2% of the total assets into any one vehicle using his bottom-up approach. More importantly, Royce is price driven, not position driven and generally sets buy and sell targets for each position.
If you want to learn more about his strategy visit the link below. http://www.roycefunds.com/About/People/roycecharles.asp
Chuck Royce has enjoyed one of the longest tenures of any mutual fund manager because of one reason - his performance has been stellar. Looking at the performance just in the Premier Fund, he has produced over 119% since 2000, an annualized return of 8.15%. Not bad considering the S&P 500 lost money for investors over the same period of time. Currently, Royce has over 28% of the $28 billion in assets placed into industrial companies and even though this is down slightly from the last period, it still makes up the majority of the advisor’s investments. Coming in second with 15% is the financial industry.
Mr. Royce stated on April 1, 2010 that his "take on this hasn't changed over the last six months. I think that we're entering a period of low, positive returns on an annualized basis, and I would not be at all surprised to see the decade end with average annual 10-year returns in the 6% - 9% range. Of course, the history of markets and economies always teaches us to expect the unexpected, but my hunch is that this decade will be as quietly positive as the previous one was wildly disappointing. So I would caution any investor who thinks that the heady returns we've all enjoyed in the current bull period are going to be the "New Normal." My guess is that we're in for a long phase of solid but unspectacular returns for equities."
Why should you follow this guru’s ideas? If you’re looking for value and companies with smaller market valuations, then Chuck Royce finds some of the best opportunities in the market. Plus, his track record has been first class.
For more details on Chuck Royce, go to: http://www.gurufocus.com/ListGuru.php?GuruName=Chuck+Royce
Five of Chuck Royce's Top Predictable Stocks:
No. 1: MEDNAX (MD, Financial), Weightings: 0.01% - 510,402 Shares
No. 2: Techne Corp. (TECH, Financial), Weightings: 0.06% - 257,400 Shares
No. 3: ITT Educational Services (ESI, Financial), Weightings: 0.02% - 38,311 Shares
No. 4: Exactech Inc. (EXAC, Financial) Weightings: 0.05% - 681,403 Shares
No. 5: Aqua America Inc. (WTR), Weightings: 0.05% - 819,766 Shares
No. 1: MEDNAX (MD)
Mednax, Inc., formerly Pediatrix Medical Group, Inc. As of December 31, 2009, the Company’s national network consisted of 1,484 affiliated physicians, including 928 physicians who provide neonatal clinical care, in 33 states and Puerto Rico, primarily within hospital-based neonatal intensive care units (NICUs), to babies born prematurely or with medical complications. Mednax, Inc. has a market cap of $2.74 billion; its shares were traded at around $58.28 with a P/E ratio of 15.42 and P/S ratio of 2.13. Mednax, Inc. had an annual average earning growth of 18.6% over the past 10 years. GuruFocus rated Mednax, Inc. the business predictability rank of 5-star.
This stock would fit into the Mid-Cap range for Chuck Royce and based on their forward earnings, current book value, and historical growth rate the stock has a Fair Value of $116 per share - a 50% margin of safety.
Chuck Royce owns 510,402 shares as of 3/31/2010, which accounts for 0.01% of the $28.31 billion portfolio.
No. 2: Techne Corp. (TECH)
Techne Corporation is a holding company which has two wholly-owned operating subsidiaries: Research and Diagnostic Systems, Inc. TECHNE Corporation, along with its subsidiaries, is engaged in the development, manufacture, and sale of biotechnology products and hematology calibrators and controls. Techne Corp. has a market cap of $2.31 billion; its shares were traded at around $61.96 with a P/E ratio of 21.15 and P/S ratio of 8.76. The dividend yield of Techne Corp. stocks is 1.68%. Techne Corp. had an annual average earning growth of 15.7% over the past 10 years. GuruFocus rated Techne Corp. the business predictability rank of 5-star.
Techne Corp. trades in a very tight range with the 52 week high and 52 week low just $11 a part. Nonetheless, based on the company's historic growth, forward earnings estimate, and current book value the stock has a fair value of $74.51 - a 18% margin of safety.
Chuck Royce owns 257,400 shares as of 3/31/2010, which accounts for 0.06% of the $28.31 billion portfolio.
No. 3: ITT Educational Services (ESI)
ITT EDUCATIONAL SERVICES, INC. is a proprietary provider of technical postsecondary degree programs in the United States based on student enrollment. As of December 31, 2009, the Company offered master, bachelor and associate degree programs to approximately 80,000 students. As of December 31, 2009, it had 125 locations (including 121 campuses and four learning sites) in 38 states. ITT Educational Services Inc. has a market cap of $3.54 billion; its shares were traded at around $102.51 with a P/E ratio of 11.53 and P/S ratio of 2.68. ITT Educational Services Inc. had an annual average earning growth of 33.9% over the past 10 years. GuruFocus rated ITT Educational Services Inc. the business predictability rank of 5-star.
This MidCap position seems to be on a strong growth trend, with earnings estimated to come in at $11.03 per share in 2010, and $12.46 per share in 2011. Considering that line of growth and the companies history, the stock has a Fair Value of $250.44.
Chuck Royce owns 38,311 shares as of 3/31/2010, which accounts for 0.02% of the $28.31 billion portfolio.
No. 4: Exactech Inc. (EXAC) Weightings: 0.05% - 681,403 Shares
Exactech develops and markets orthopedic implant devices, related surgical instruments and biologic materials and services to hospitals and physicians. It manufactures some components of knee, extremity, and hip joint replacement systems at its facility in Gainesville, Florida. The joint replacement products are used by orthopedic surgeons to repair or replace joints that have deteriorated as a result of injury or disease. Reconstructive joint surgery involves the modification of the area surrounding the affected joint and the insertion of a set of manufactured implant components to replace or augment the joint. Spinal implants are used as an adjunct to the fusion of vertebrae in the treatment of spinal disease and deformity. Exactech Inc. has a market cap of $256.89 million; its shares were traded at around $19.97 with a P/E ratio of 19.58 and P/S ratio of 1.45. Exactech Inc. had an annual average earning growth of 8.6% over the past 10 years. GuruFocus rated Exactech Inc. the business predictability rank of 5-star.
While the earnings yield isn't great at its current price, the management of the company has done a fantastic job increasing the book value by 230% over the last decade. The company has a Fair Value of $22.73 - a 13% margin of safety.
Chuck Royce owns 681,403 shares as of 3/31/2010, which accounts for 0.05% of the $28.31 billion portfolio.
No. 5: L3 Communications (LLL, Financial), Weightings:
L-3 Communications Holdings, Inc. (L-3) is a prime system contractor in aircraft modernization and maintenance, command, control, communications, intelligence, surveillance and reconnaissance (C3ISR) systems, and government services. L-3 is also a provider of technology products, subsystems and systems. The Company has four segments: C3ISR, Government services, aircraft modernization and maintenance (AM&M), and Electronic systems. L3 Communications Holdings Inc. has a market cap of $10.22 billion; its shares were traded at around $88.33 with a P/E ratio of 11.62 and P/S ratio of 0.65. The dividend yield of L3 Communications Holdings Inc. stocks is 1.81%. L3 Communications Holdings Inc. had an annual average earning growth of 19.2% over the past 10 years. GuruFocus rated L3 Communications Holdings Inc. the business predictability rank of 5-star.
Despite being a small position in Royce's portfolio, L-3 is not a typical investment made by Chuck with a market value of $10.27 billion. Either way, the stock offers very impressive historical growth in both earnings and book value, and based on it's forward earnings, has a Fair Value of $227.42 per share.
Chuck Royce owns 4,170 shares as of 3/31/2010, which accounts for less than 0.01% of the $28.31 billion portfolio.
The stock highlighted above are only what I feel are the best ideas still mispriced within this guru's portfolio. No one cares more about your money than you do. And, by using GuruFocus.com anyone can find stocks that fit their personal investment criteria. Remember, that you shouldn’t always follow the guru’s stock picks, but instead learn from both their mistakes and their success to become a better investor.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Chuck Royce for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
Also check out:
As you know, Chuck Royce is the Co-Chief Investment Officer of Royce & Associates LLC, which manages The Royce Funds. The company was acquired in 1972 by Mr. Royce and became a wholly owned, independent subsidiary of Legg Mason, Inc. in October 2001. As of March 31, 2010 the investment advisor managed $28.31 billion and was invested in 1512 stocks. The Royce Funds includes 26 open-end mutual funds, three closed-end funds and two open-end mutual funds offered to variable annuity and variable life insurance companies. In each portfolio they pay close attention to risk and maintaining their discipline, regardless of market movements and trends.
Chuck Royce is one of the pioneers of small-cap investing, and uses value investing strategies to find small cap stocks. These companies are defined as being less market capitalizations under $2.5 billion with MicroCaps being $500 million and under. He's also stepped up his investments into Mid-Cap stocks with less than $10 billion.
He seeks absolute returns and focuses on these smaller companies that meet his value investing philosophy. Using this philosophy, he views sustainable returns as one of the most important factor when looking at the "numbers" and keeps a keen eye on the debt when investing into any business. The fund manager also holds no more than 100 securities at any one time and invests up to 2% of the total assets into any one vehicle using his bottom-up approach. More importantly, Royce is price driven, not position driven and generally sets buy and sell targets for each position.
If you want to learn more about his strategy visit the link below. http://www.roycefunds.com/About/People/roycecharles.asp
Chuck Royce has enjoyed one of the longest tenures of any mutual fund manager because of one reason - his performance has been stellar. Looking at the performance just in the Premier Fund, he has produced over 119% since 2000, an annualized return of 8.15%. Not bad considering the S&P 500 lost money for investors over the same period of time. Currently, Royce has over 28% of the $28 billion in assets placed into industrial companies and even though this is down slightly from the last period, it still makes up the majority of the advisor’s investments. Coming in second with 15% is the financial industry.
Mr. Royce stated on April 1, 2010 that his "take on this hasn't changed over the last six months. I think that we're entering a period of low, positive returns on an annualized basis, and I would not be at all surprised to see the decade end with average annual 10-year returns in the 6% - 9% range. Of course, the history of markets and economies always teaches us to expect the unexpected, but my hunch is that this decade will be as quietly positive as the previous one was wildly disappointing. So I would caution any investor who thinks that the heady returns we've all enjoyed in the current bull period are going to be the "New Normal." My guess is that we're in for a long phase of solid but unspectacular returns for equities."
Why should you follow this guru’s ideas? If you’re looking for value and companies with smaller market valuations, then Chuck Royce finds some of the best opportunities in the market. Plus, his track record has been first class.
For more details on Chuck Royce, go to: http://www.gurufocus.com/ListGuru.php?GuruName=Chuck+Royce
Five of Chuck Royce's Top Predictable Stocks:
No. 1: MEDNAX (MD, Financial), Weightings: 0.01% - 510,402 Shares
No. 2: Techne Corp. (TECH, Financial), Weightings: 0.06% - 257,400 Shares
No. 3: ITT Educational Services (ESI, Financial), Weightings: 0.02% - 38,311 Shares
No. 4: Exactech Inc. (EXAC, Financial) Weightings: 0.05% - 681,403 Shares
No. 5: Aqua America Inc. (WTR), Weightings: 0.05% - 819,766 Shares
No. 1: MEDNAX (MD)
Mednax, Inc., formerly Pediatrix Medical Group, Inc. As of December 31, 2009, the Company’s national network consisted of 1,484 affiliated physicians, including 928 physicians who provide neonatal clinical care, in 33 states and Puerto Rico, primarily within hospital-based neonatal intensive care units (NICUs), to babies born prematurely or with medical complications. Mednax, Inc. has a market cap of $2.74 billion; its shares were traded at around $58.28 with a P/E ratio of 15.42 and P/S ratio of 2.13. Mednax, Inc. had an annual average earning growth of 18.6% over the past 10 years. GuruFocus rated Mednax, Inc. the business predictability rank of 5-star.
This stock would fit into the Mid-Cap range for Chuck Royce and based on their forward earnings, current book value, and historical growth rate the stock has a Fair Value of $116 per share - a 50% margin of safety.
Chuck Royce owns 510,402 shares as of 3/31/2010, which accounts for 0.01% of the $28.31 billion portfolio.
No. 2: Techne Corp. (TECH)
Techne Corporation is a holding company which has two wholly-owned operating subsidiaries: Research and Diagnostic Systems, Inc. TECHNE Corporation, along with its subsidiaries, is engaged in the development, manufacture, and sale of biotechnology products and hematology calibrators and controls. Techne Corp. has a market cap of $2.31 billion; its shares were traded at around $61.96 with a P/E ratio of 21.15 and P/S ratio of 8.76. The dividend yield of Techne Corp. stocks is 1.68%. Techne Corp. had an annual average earning growth of 15.7% over the past 10 years. GuruFocus rated Techne Corp. the business predictability rank of 5-star.
Techne Corp. trades in a very tight range with the 52 week high and 52 week low just $11 a part. Nonetheless, based on the company's historic growth, forward earnings estimate, and current book value the stock has a fair value of $74.51 - a 18% margin of safety.
Chuck Royce owns 257,400 shares as of 3/31/2010, which accounts for 0.06% of the $28.31 billion portfolio.
No. 3: ITT Educational Services (ESI)
ITT EDUCATIONAL SERVICES, INC. is a proprietary provider of technical postsecondary degree programs in the United States based on student enrollment. As of December 31, 2009, the Company offered master, bachelor and associate degree programs to approximately 80,000 students. As of December 31, 2009, it had 125 locations (including 121 campuses and four learning sites) in 38 states. ITT Educational Services Inc. has a market cap of $3.54 billion; its shares were traded at around $102.51 with a P/E ratio of 11.53 and P/S ratio of 2.68. ITT Educational Services Inc. had an annual average earning growth of 33.9% over the past 10 years. GuruFocus rated ITT Educational Services Inc. the business predictability rank of 5-star.
This MidCap position seems to be on a strong growth trend, with earnings estimated to come in at $11.03 per share in 2010, and $12.46 per share in 2011. Considering that line of growth and the companies history, the stock has a Fair Value of $250.44.
Chuck Royce owns 38,311 shares as of 3/31/2010, which accounts for 0.02% of the $28.31 billion portfolio.
No. 4: Exactech Inc. (EXAC) Weightings: 0.05% - 681,403 Shares
Exactech develops and markets orthopedic implant devices, related surgical instruments and biologic materials and services to hospitals and physicians. It manufactures some components of knee, extremity, and hip joint replacement systems at its facility in Gainesville, Florida. The joint replacement products are used by orthopedic surgeons to repair or replace joints that have deteriorated as a result of injury or disease. Reconstructive joint surgery involves the modification of the area surrounding the affected joint and the insertion of a set of manufactured implant components to replace or augment the joint. Spinal implants are used as an adjunct to the fusion of vertebrae in the treatment of spinal disease and deformity. Exactech Inc. has a market cap of $256.89 million; its shares were traded at around $19.97 with a P/E ratio of 19.58 and P/S ratio of 1.45. Exactech Inc. had an annual average earning growth of 8.6% over the past 10 years. GuruFocus rated Exactech Inc. the business predictability rank of 5-star.
While the earnings yield isn't great at its current price, the management of the company has done a fantastic job increasing the book value by 230% over the last decade. The company has a Fair Value of $22.73 - a 13% margin of safety.
Chuck Royce owns 681,403 shares as of 3/31/2010, which accounts for 0.05% of the $28.31 billion portfolio.
No. 5: L3 Communications (LLL, Financial), Weightings:
L-3 Communications Holdings, Inc. (L-3) is a prime system contractor in aircraft modernization and maintenance, command, control, communications, intelligence, surveillance and reconnaissance (C3ISR) systems, and government services. L-3 is also a provider of technology products, subsystems and systems. The Company has four segments: C3ISR, Government services, aircraft modernization and maintenance (AM&M), and Electronic systems. L3 Communications Holdings Inc. has a market cap of $10.22 billion; its shares were traded at around $88.33 with a P/E ratio of 11.62 and P/S ratio of 0.65. The dividend yield of L3 Communications Holdings Inc. stocks is 1.81%. L3 Communications Holdings Inc. had an annual average earning growth of 19.2% over the past 10 years. GuruFocus rated L3 Communications Holdings Inc. the business predictability rank of 5-star.
Despite being a small position in Royce's portfolio, L-3 is not a typical investment made by Chuck with a market value of $10.27 billion. Either way, the stock offers very impressive historical growth in both earnings and book value, and based on it's forward earnings, has a Fair Value of $227.42 per share.
Chuck Royce owns 4,170 shares as of 3/31/2010, which accounts for less than 0.01% of the $28.31 billion portfolio.
The stock highlighted above are only what I feel are the best ideas still mispriced within this guru's portfolio. No one cares more about your money than you do. And, by using GuruFocus.com anyone can find stocks that fit their personal investment criteria. Remember, that you shouldn’t always follow the guru’s stock picks, but instead learn from both their mistakes and their success to become a better investor.
GuruFocus provides real time information and insights of Investment Gurus such as Warren Buffett and Chuck Royce for Premium Members. If you are not a premium member, click here to sign up or upgrade. 7-Day Free Trial is available.
Also check out:
