Billionaire Chuck Royce’s Most-Loved Small-Cap Value Picks For Q4

Royce & Associates is a renowned New York-based value-focused equity mutual fund founded by billionaire Chuck Royce in 1972. Since its inception, Mr. Royce, who holds an MBA from Columbia University, has remained the CEO of the firm. Royce & Associates generally invests in small and micro-cap companies using value investment principles and most of the time holds on to its investments for multiple years. The fund recently submitted its 13F filing with the Securities and Exchange Commission (SEC) for the reporting period of September 30. According to the filing, Royce & Associates’ U.S equity portfolio at the end of September was worth $18.86 billion, which was a 20% drop from the $23.67 billion that it was worth at the end of June, owing to the particularly turbulent third quarter for small-cap equities. The filing also revealed that Royce & Associates’ equity portfolio had a miniscule quarter-over-quarter turnover of 12.58%, which stresses the above point of his long-term conviction in his stock picks. In this article, we will take a closer look at the fund’s top five stock picks going into the fourth quarter.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. the S&P 500’s 49% gain) over the last 38 months (see the details here).

#5 Ritchie Bros. Auctioneers (USA) (NYSE:RBA)

– Shares Owned by Royce & Associates (as of September 30): 7.15 Million

– Value of Holding (as of September 30): $185.04 Million

After selling off 15% of its stake in Ritchie Bros. Auctioneers (USA) (NYSE:RBA) during the second quarter, Royce & Associates sold off another 15% of it during the third quarter, relegating Ritchie Bros. Auctioneers (USA) (NYSE:RBA) to its fifth-largest equity holding. Shares of Ritchie Bros. Auctioneers have remained range-bound throughout 2015; although they tried twice to break the $30 mark this year they weren’t able to do so convincingly and currently trade nearly flat for the year. Despite the stock of the company not making any noteworthy movement, its popularity among hedge funds saw a noteworthy increase during the third quarter. The number of hedge funds tracked by Insider Monkey that reported a stake in the company climbed to 24 as of the end of September, from just 15 as of the end of June. Among the hedge funds that initiated a stake in the company during the third quarter was Paul Marshall and Ian Wace‘s Marshall Wace LLP, which bought 139,006 shares of the company during that period.

#4 Cal-Maine Foods Inc (NASDAQ:CALM)

– Shares Owned by Royce & Associates (as of September 30): 3.5 Million

– Value of Holding (as of September 30): $191.8 Million

Though Royce & Associates trimmed its stake in Cal-Maine Foods Inc (NASDAQ:CALM) by 2% during the third quarter, the 5.2% rise of the stock during the period helped it climb six spots quarter-over-quarter to become the fund’s fourth-largest equity holding. Thanks largely to the spike Cal-Maine Foods Inc (NASDAQ:CALM)’s stock saw after reports emerged of an outbreak of avian influenza in the U.S Midwest, it is currently trading up by 40% year-to-date. On October 20, analysts at Stephens downgraded the stock to ‘Equal Weight’ from ‘Overweight’. Daniel Gold‘s QVT Financial more than doubled its stake in the company to 469,800 shares during the July-to-September period.

#3 MKS Instruments, Inc. (NASDAQ:MKSI)

– Shares Owned by Royce & Associates (as of September 30): 6.37 Million

– Value of Holding (as of September 30): $213.65 Million

Royce & Associates reduced its stake in MKS Instruments, Inc. (NASDAQ:MKSI) by 6% during the third quarter, pushing it down a spot to being the fund’s third-largest equity holding on September 30. Nevertheless, the ownership of the company among hedge funds we track saw a slight increase during the same period, rising to 23 from 22. For much of 2015, shares of MKS Instruments, Inc. (NASDAQ:MKSI) have traded in the $32-to-$38 range and currently trade flat for the year. On October 23, analysts at Dougherty & Co reiterated their ‘Buy’ rating on the stock, while lowering their price target on it to $42 from $44. After Royce & Associates, Spencer M. Waxman‘s Shannon River Fund Management was the second-largest shareholder of MKS Instruments, Inc. (NASDAQ:MKSI) on September 30, among the funds we track.

#2 Buckle Inc (NYSE:BKE)

– Shares Owned by Royce & Associates (as of September 30): 6.16 Million

– Value of Holding (as of September 30): $227.78 Million

Moving on, the stock of Buckle Inc (NYSE:BKE) has been on a constant downward path since the start of the year and currently trades down by 40% year-to-date. However, this underperformance has actually made the company more attractive for hedge funds, which can be gauged from the fact that 16 firms in our database held shares of the company on September 30, up from 13 at the end of June. Buckle Inc (NYSE:BKE) was Royce & Associates’ favorite stock pick at the end of the second quarter, but the decline in the stock coupled with the fund selling 7% of its position during the third quarter caused it to lose that spot. On November 19, the company reported its third quarter earnings, declaring EPS of $0.74 on revenue of $280.20 million, missing analyst expectations of EPS of $0.78 on revenue of $288.61 million. Joel Greenblatt‘s Gotham Asset Management reduced its stake in the company by 59% to 207,707 shares during the third quarter.

#1 UniFirst Corp (NYSE:UNF)

– Shares Owned by Royce & Associates (as of September 30): 2.17 Million

– Value of Holding (as of September 30): $232.17 Million

Finally, during  the third quarter the stock of UniFirst Corp (NYSE:UNF) declined by 4.4%, while Royce & Associates sold 44,340 shares of the company. Nonetheless, UniFirst Corp jumped to the top spot in Royce & Associates’ equity portfolio by the end of September, from previously ranking third. Shares of UniFirst Corp (NYSE:UNF) have undergone a slow and gradual decline since April and currently trade down by more than 10% year-to-date. For the fourth quarter of fiscal year 2015, the work wear manufacturer reported EPS of $1.43 on revenue of $359.20 million. Analysts had expected the company to report EPS of $1.30 on revenue of $359.94 million. Of the 18 investment firms tracked by Insider Monkey that disclosed ownership of UniFirst Corp shares as of the end of September, Clint Carlson‘s Carlson Capital was another one that trimmed its stake in the stock during the July-to-September period; it held 67,900 shares of the company on September 30.

Disclosure: None