Reviewing Royce Funds

 | Nov 13, 2013 | 4:00 PM EST  | Comments
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Stock quotes in this article:

aaww

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ucp

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avhi

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tph

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pico

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balt

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asc

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glog

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As we get closer to the Thursday deadline, we are seeing the 13Fs roll into the Securities and Exchange Commission (SEC). I have a pile of them on the desk from people I respect and follow to review. I have also randomly searched though a lot of filings from managers I am not familiar with to see if there any new smart follow and steal stock ideas from.

One old reliable name that has filed its holdings for the third quarter is The Royce Funds. Headed up by veteran stock picker Chuck Royce, the firm has a long tradition of using value principles to pick small-cap stocks. I have stolen many solid ideas from Royce and his team over the years. The firm has more than 30 funds and $38 billion under management. The associates like to own a lot of different stocks with relatively small position sizes in most of their funds.

One of his new purchases in the quarter has since run into earnings and guidance difficulties and had its stock price hammered since the end of the quarter. Atlas Air Worldwide Holdings (AAWW) has seen its stock price drop by 15% in the last month after lowering guidance below Street expectation. The company, which provides outsourced aircraft and aviation operating services in the U.S., lowered its forecast for the full year to between $3.40 and $3.80 per share. Wall Street analysts had been hoping for $4.73 a share for the year. The stock now trades at about 80% of its tangible book value and is buying back stock at very low valuations. This company has the largest fleet of Boeing 747 freight aircraft in the world and is doing pretty well in a difficult air freight market. It has also been hit by reduced military cargo shipments this year. The company is worth a deeper look as it appears to be a good business on sale.

Royce clearly likes the long-term future of the homebuilding segment, especially the smaller builders. The firm has new positions in UCP Inc. (UCP), AV Homes (AVHI), Meritage Homes (MTH) and TRI Point Homes (TPH) in the quarter. The thesis makes some sense to me, as it should benefit from a long-term recovery in the housing markets. However, the stocks simply are not cheap enough for me yet -- with the exception of AV Homes, which I have owned for some time now. UCP, which is 57% owned by Pico Holdings (PICO) is trading at 1.1x book value and may have the most upside with its large exposure. But the way to play it is probably buying the parent to gain exposure to its other businesses, such as water and agriculture. Pico is also trading at 1.1 times book value and would be a tremendous buy in a market decline.

The firm also opened a potion in a stock that is creeping up on my buy list. Baltic Trading (BALT) shares are changing hands at a little less than 50% of book value even after a strong run up this year. The company is in the dry bulk shipping business and owns 11 vessels right now. It just completed a stock offering and raised $50 million to buy new ships in the current depressed market. I detest stock offerings at less than book value but I have to admit that expanding with equity proceeds makes more sense than using debt financing in this very volatile shipping market. I haven't pulled the trigger on this stock yet, but I am getting close.

The firm apparently shares some of my enthusiasm for the long-term future of the shipping industry as it also initiated positions in Ardmore Shipping (ASC) and GasLog (GLOG) over the summer. It also added to its stake in Genco Shipping and Trading (GNK) in a big way during the quarter and owns several other shipping stocks, including Diana Shipping (DSX). This sector is not for the faint of heart but it does offer the potential for enormous long-term returns.

I have always gotten at least an idea or two from the Royce filings. Given the level of buying and selling activity by the giant value firm, it would be hard not to find something worth buying. It is worth your time to read over the filing in search of small-cap value stocks worth owning.

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