, president and co-chief investment officer of the almost
40-year-old The Royce Funds, is primarily a small-cap investor.
He described the firm's investing process in his second quarter
"We seek companies that look capable of surviving
adversity and flourishing when their fortunes change.
Those that generate free cash via high returns on capital can
give investors a return in the form of dividends, take advantage
of their low valuation by buying back stock, or make acquisitions
to grow their business when organic growth is harder to come by.
Strong fundamentals mean these companies have the necessary tools
to make it through difficult periods and emerge stronger."
Royce also wrote in the same letter that he believes the macro
events - Europe, fragile U.S. recovery and Chinese economic
deceleration - that have dominated investor behavior should
subside and result in a "less extreme, more historically normal
phase," with less volatility. In the future, they estimate that
stocks will deliver returns in the mid- to upper-single digits.
In the second quarter, Royce's largest new purchases were: Alex
& Baldwin (
), Entegris Inc. (
), Tahoe Resources (
), Deckers Outdoor Corp. (
) and Parametric Technology (
Royce bought 494,700 shares of
Alexander & Baldwin (
in the second quarter. ALEX is the Hawaii-based land, agriculture
and transportation company that separated its transportation and
land businesses into two publicly traded companies in June,
naming the ocean transportation company Matson Inc. (
). It is thought that
, noted activist investor who owns 8.6% of the company,
influenced the decision.
ALEX's agribusiness consists of three sugar plantations of
130,000 acres and is the state's largest farmer. Its real estate
business is the state's most active real estate investor, with
88,000 acres primarily on Maui and Kauai and other assets.
ALEX has a market cap of $1.25 billion; its shares were traded at
In the second quarter, ALEX's real estate leasing operating
profit was $10.5 million, compared to $10.4 million the previous
year. Its agribusiness reported operating profit was $7 million,
a $1.5 million decline from the previous year. The company sold
roughly the same amount of sugar in the second quarter, but the
price it received for sugar was higher in the second quarter of
2011. The company's revenue in the second quarter was $72.4
million, compared to $73.2 million the previous year.
ALEX can be considered a play on Hawaii's economic recovery. In
2011, the number of building permits declined 26%, but has
increased 23.1% as of April 30, 2012. The unemployment rate also
declined for the last three years, while GDP grew at a rate of
1.2% for 2010 and 2011.
Royce bought 2,972,000 shares of
at an average price of $8. Royce has traded this stock many times
in the past, most recently selling out of a position in the first
quarter of 2011.
Entegris is a provider of materials management solutions to the
microelectronics industry including, in particular, the
semiconductor manufacturing and disk manufacturing markets.
Entegris has a market cap of $1.21 billion; its shares were
traded at around $9.12 with a P/E ratio of 14 and P/S ratio of
1.6. The stock is currently trading near a one-year high P/E of
12.7 times earnings.
In 2011, the company achieved record sales, earnings and cash
flow, with new emerging markets performing well and strong
contribution from new products, and grew faster than its markets
and peers. It also achieved record cash flow from operations,
record operating profit, has a cash balance exceeding $265
million and no debt.
In the second quarter, Entegris' sales declined 10% from the
prior year, and earnings per share were $0.16 compared to $0.24
the prior year. It expects sales to be flat to do 5% for the
fiscal third quarter.
Royce purchased 1,628,400 shares of
Tahoe Resources (
. The stock trades for $19 on Friday.
Tahoe Resources Inc. is engaged in the exploration and
development of mineral properties in the U.S. for the mining of
precious metals. It is focusing on developing its Guatemalan
Escobal project into a profitable mining operation and becoming a
leading silver producer. The company trades on the Toronto Stock
), and joined the New York Stock Exchange (NYSE) in May 2012.
The Escobal project is still in the exploration, development and
construction phase and is awaiting an exploitation permit. It has
posted net losses for the last five quarters.
Royce bought 279,000 shares of
Deckers Outdoor Corp. (
at an average price of $55.50. The stock has declined almost 40%
year to date after several years of growth.
Deckers Outdoor Corp. designs, manufactures and markets
innovative, function-oriented footwear and apparel that have been
developed for high-performance outdoor, sports and other
lifestyle-related activities, as well as for casual use.
Deckers Outdoor Corp. has a market cap of $1.91 billion; its
shares were traded at around $46.12 with a P/E ratio of 11.2 and
P/S ratio of 1.4. Deckers Outdoor Corp. had an annual average
earnings growth of 40.7% over the past 10 years. GuruFocus rated
Deckers Outdoor Corp.
the business predictability rank of 4.5-star
Decker is also the maker of UGG sheepskin boots, which comprises
about 62% of its total sales. Baron Funds commented in May that
they believed the company faced headwinds from increased costs of
sheepskin and one of the warmest winters on record, causing it to
issue earnings guidance lower than analysts' expected. "We
believe sheepskin prices are peaking and will decline in 2013,
giving a cost to 2013 earnings. We also believe weather patterns
will eventually return to the mean,"
Baron Funds wrote
Royce bought 527,000 shares of
Parametric Technology (
at an average price of $21. He has traded this stock numerous
times in the past.
Parametric Technology Corporation develops, markets and supports
collaborative product commerce software solutions that help
companies manage the product development process in order to
better shape innovation and achieve sustained competitive
advantage. Parametric Technology has a market cap of $2.54
billion; its shares were traded at around $22.37 with a P/E ratio
of 20.1 and P/S ratio of 2.2.
In April, Parametric's stock dropped more than 20% in April when
it announced its preliminary second-quarter results that were
below its guidance. Results were lower primarily because a large
European transaction failed to close and performance in North
America was beneath expectations, contributing to reduced license
In the third quarter, revenue was toward the higher end of its
guidance range and EPS was higher than its guidance range, which
sent the stock price up.
See Chuck Royce's portfolio here. Also check out the Undervalued
Stocks, Top Growth Companies and High Yield stocks of Chuck
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