67 WALL STREET, New York - December 27, 2013 - The Wall Street Transcript has just published its current Investing Strategies Report. This special feature contains expert commentary through in-depth interviews with highly experienced Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.
Topics covered: Small Cap Investing - Upside in Small-Cap Stocks - Contrarian Approach to Investing - Quality of Business - Investing in Tangible Assets - Value in Emerging Markets - Cash-Flow-Oriented Global Companies - Turnaround Situations in Small and Micro Caps
Companies include: Wal-Mart Stores Inc. (WMT), Macy's, Inc. (M), Bon-Ton Stores Inc. (BONT), Extreme Networks Inc. (EXTR), Krispy Kreme Doughnuts Inc. (KKD) and many others.
In the following excerpt from the Investing Strategies Report, an experienced portfolio manager discusses his methodology for finding small and micro cap turnaround stocks:
TWST: Tell us a little bit about Royce Funds. When was the firm established, and how large is the organization?
Mr. Hench: Chuck Royce started the firm in 1972. He bought Pennsylvania Mutual Fund, and from there he grew the business, expanding again in 1998 when he hired Buzz Zaino and Charlie Dreifus, who each had established themselves prior to joining Chuck, Buzz at Trust Company of the West, and Charlie at Lazard. Each managed small-cap products of their own. Since then we have added people, and now we have a 120-personnel organization with about $38 billion under management.
TWST: What do you see as the current market climate right now, and what are some of the most important drivers for your investment process?
Mr. Hench: The market has been on a very, very good run for a while now. There have been some scares and some setbacks, minor and short-lived, especially with the confusion over what was going to happen with interest rates. The funds that Buzz and I work on focus principally on turnaround situations with market caps generally in the $2.5 billion range, though some of them are quite a bit smaller.
We try to find names that are suffering in the short term. So when you have adjustments in the product cycle or when you have costs that are too high, their sector might be out of favor. We see these as temporary issues that can be fixed. Sometimes it means the company needs new management, sometimes it just means waiting until things get better, but we believe over time if you can find those things where we have temporary issues and hold on to them as things get better, you tend to get pretty good returns.
The market, as I said, has been running pretty strong, but as is always the case, there are some pockets that are not doing as well. Recently we've been looking at nonresidential construction, a lot of the retailers, although they seem to be taking upstream here in the short term as well, a lot of things related to the commercial vehicle builds, even some of the housing names have gotten cheap again. So there are always spots where we see opportunity. We try to have a portfolio where we have ideas that are going to provide strong returns in a year and a half or two years.
TWST: In terms of finding turnaround companies, there is obviously a delicate balance between a company that has temporary problems that can be turned around and a company that is inexpensive because it is just in really bad shape. What are some examples of issues that could make a stock price drop that you would view as a temporary, fixable issue?
For more of this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.