Small-Cap Equity Specialist Royce & Associates Reveals Top Stock Picks for Q2

Royce & Associates LP, a widely-known small-cap equity specialist, was founded by highly-regarded mutual fund manager Charles M. Royce in 1972. The New York-based investment firm has pioneered small-cap investing for more than four decades and currently manages micro-cap, small-cap, and small/mid-cap portfolios. Royce & Associates seeks to identify promising companies with healthy balance sheets, high internal rates of return, and excess cash flow, so the firm’s equity portfolio most likely includes numerous highly-promising investment candidates. Given that Insider Monkey is a prominent believer in the underlying growth potential of the small-cap equity space, we decided to lay out a list of the five top stock picks embedded in the equity portfolio of Royce & Associates.

Our backtests that covered the period between 1999 and 2012 showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see more details here).

#5. Federated Investors Inc. (NYSE:FII)

 – Number of shares owned by Royce & Associates (as of March 31): 4.96 Million

 – Value of Royce & Associates’ holding (as of March 31): $143.20 Million

Royce & Associates cut its stake in Federated Investors Inc. (NYSE:FII) by 233,731 shares or roughly 4% during the March quarter, to 4.96 million shares, which were valued at $143.20 million at the end of March. The U.S investment manager, which had nearly $370 billion in managed assets on March 31, has seen its market value gain 9% since the start of 2016. The firm’s revenue for the first quarter was $272.11 million, up by $51.6 million year-over-year. The increase was mainly driven by a decrease in voluntary waivers that were put in place for certain money market funds to maintain positive or zero net yields. Hence, the Federal Reserve’s decision to raise interest rates for the first time in nearly a decade is reflected in the financial performance of Federated Investors. Murray Stahl’s Horizon Asset Management reported owning nearly 277,000 shares of Federated Investors Inc. (NYSE:FII) through its 13F for the first quarter.

#4. Buckle Inc. (NYSE:BKE)

 – Number of shares owned by Royce & Associates (as of March 31): 4.35 Million

 – Value of Royce & Associates’ holding (as of March 31): $147.19 Million

The small-cap equity specialist also trimmed its position in Buckle Inc. (NYSE:BKE) during the first quarter, by 1.58 million shares. The remaining stake of 4.35 million shares owned on March 31 was worth $147.19 million and accounted for 0.93% of the fund’s equity portfolio. The retailer of casual apparel, footwear and accessories has not enjoyed a great stock performance since the beginning of 2015, as Buckle shares have lost well over half of their value. Just recently, the operator of 468 retail stores across 44 states in the United States said that comparable-store net sales decreased by 13.2% year-over-year in April. Research firm Retail Metrics had anticipated a same-store sales decline of just 6.6%, so things are looking rather bleak for the retailer at the moment. Eric Sportt’s Sprott Asset Management maintained ownership of 155,000 shares of Buckle Inc. (NYSE:BKE) throughout the March quarter.

We’ll check out Royce & Associates’ favorite three stocks on the next page.

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

 – Number of shares owned by Royce & Associates (as of March 31): 5.52 Million

 – Value of Royce & Associates’ holding (as of March 31): $149.56 Million

The New York-based asset manager had 5.52 million shares of Ritchie Bros. Auctioneers (USA) (NYSE:RBA) in its equity portfolio at the end of March, 1.09 million shares less than it held at the end of December. The trimmed stake was worth $149.56 million on March 31, accounting for 0.94% of the fund’s $15.85 billion portfolio. Ritchie Bros. Auctioneers is the world’s largest auctioneer of heavy machinery, which is sold through the company’s unreserved auctions and online marketplaces. The company operates 44 permanent and regional auction sites around the world, but a big chunk of its revenue is derived from its online used equipment marketplace, called EquipmentOne. In February 2016, the company acquired Amsterdam-based Mascus International Holding BV, which operates a global online portal for the sale and purchase of heavy equipment and vehicles. The freshly-acquired company has the largest online market presence for heavy machinery and trucks on the European continent. Ritchie’s shares have gained an impressive 32% since the start of 2016. Tom Gayner’s Markel Gayner Asset Management owns 109,000 shares of Ritchie Bros. Auctioneers (USA) (NYSE:RBA) as of the end of the first quarter.

#2. MKS Instruments Inc. (NASDAQ:MKSI)

 – Number of shares owned by Royce & Associates (as of March 31): 4.12 Million

 – Value of Royce & Associates’ holding (as of March 31): $155.15 Million

Royce & Associates reduced its exposure to MKS Instruments Inc. (NASDAQ:MKSI) by 742,207 shares during the first three months of the year, ending the March quarter with 4.12 million shares worth $155.15 million. The provider of instruments, subsystems and process control solutions for manufacturing processes has seen its shares gain 3% since the beginning of the year. At the end of April, MKS Instruments completed the acquisition of Newport Corporation, a supplier of advanced-technology products and systems to various end-markets, for $23.00 per share and a repayment of $93 million of indebtedness. The company funded the acquisition with cash on hand and a seven-year, $780 million secured term loan. MKS Instruments currently pays out a quarterly dividend of $0.17 per share to shareholders, which equates to an annual dividend yield of 1.84%. Ken Fisher’s Fisher Asset Management is the owner of 662,634 shares of MKS Instruments Inc. (NASDAQ:MKSI) as of the end of March.

#1. UniFirst Corp (NYSE:UNF)

 – Number of shares owned by Royce & Associates (as of March 31): 1.69 Million

 – Value of Royce & Associates’ holding (as of March 31): $184.68 Million

The small-cap expert also cut its stake in UniFirst Corp (NYSE:UNF), the fund’s top stock pick at the end of the fourth quarter, selling 431,654 shares of the company during the first quarter, ending March with 1.69 million shares valued at $184.68 million. After reporting revenue of $363.1 million for the second quarter of fiscal year 2016 ended February 27, the U.S provider of workplace uniforms and protective wear clothing said that it anticipates full-year revenue in the range of $1.455 billion-to-$1.467 billion. The company has a debt-free balance sheet as of the end of February, with cash and cash equivalents amounting to $335 million. UniFirst’s organic growth has been somewhat hampered by weak energy market conditions, as its businesses that service the oil industry experienced weaker demand due to elevated headcount cuts. Nonetheless, UniFirst shares have advanced by 6% since the start of 2016. First Eagle Investment Management, overseen by Mehdi Mahmud, acquired a stake of 11,599 shares of UniFirst Corp (NYSE:UNF) during the first quarter.

Disclosure: None