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The Top 5 Buys of Chuck Royce's Firm

Royce & Associates, the investment firm founded in 1972 by renowned guru Chuck Royce (Trades, Portfolio), revealed 103 new positions in its second-quarter portfolio, which was released earlier this week.

The New York-based firm, which specializes in small-cap companies, picks stocks based on an active, bottom-up, risk-conscious and fundamental approach. The portfolio managers also look for value opportunities among companies trading at a discount to enterprise value.

Based on these criteria, the firm's top five new buys for the quarter were Alliance Resource Partners LP (NASDAQ:ARLP), Generac Holdings Inc. (NYSE:GNRC), G-III Apparel Group Ltd. (NASDAQ:GIII), Bloom Energy Corp. (NYSE:BE) and Tradeweb Markets Inc. (NASDAQ:TW).

Alliance Resource Partners

After exiting a position in Alliance Resource Parnters in the fourth quarter of 2013, the firm entered a new 793,583-share holding, impacting the equity portfolio by 0.12%. The stock traded for an average price of $18.16 per share during the quarter.

The Tulsa, Oklahoma-based coal miner has a $1.89 billion market cap and an enterprise value of $2.45 billion; its shares were trading around $14.69 on Tuesday with a price-earnings ratio of 4.20, a price-book ratio of 1.38 and a price-sales ratio of 0.94.

The Peter Lynch chart shows the stock is trading below its fair value, suggesting it is undervalued.

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GuruFocus rated Alliance Resource Partners' financial strength 5.5 out of 10. Although the company has sufficient interest coverage, the Altman Z-Score of 2.6 indicates it is under some financial pressure as its revenue per share has been declining for the past five years.

The company's profitability and growth scored a 4 out of 10 rating. Although the operating margin is in decline, it still outperforms over half of its competitors. Alliance Resource is also supported by strong returns, a moderate Piotroski F-Score of 6, which implies operations are stable, and a business predictability rank of one out of five stars. According to GuruFocus, companies with this rank typically see their stocks gain an average of 1.1% per annum over a 10-year period.

Royce's firm holds 0.62% of the company's outstanding shares. Jim Simons (Trades, Portfolio)' Renaissance Technologies is also a shareholder.

Generac

Having previously divested of a position in Generac in the fourth quarter of 2018, Royce's firm opened a new 194,600-share holding. The trade expanded the equity portfolio by 0.12%. Shares traded for an average price of $58.36 during the quarter.

Headquartered in Wisconsin, the company, which manufactures power generation equipment, has a market cap of $4.52 billion and an enterprise value of $5.29 billion; its shares were trading around $72.41 on Tuesday with a price-earnings ratio of 18.59, a price-book ratio of 5.56 and a price-sales ratio of 2.21.

According to the Peter Lynch chart, the stock is overvalued.

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Generac's financial strength was rated 5.3 out of 10 by GuruFocus. Supported by adequate interest coverage, the Altman Z-Score of 3.75 suggests the company is in good financial health.

The company's profitability and growth scored a 5 out of 10 rating. Although margins are declining, its returns are robust and outperforming a majority of industry peers. Generac is also supported by a high Piotroski F-Score of 7, which indicates operations are healthy, and a one-star business predictability rank.

Of the gurus invested in Generac, Mairs and Power (Trades, Portfolio) has the largest position with 1.09% of outstanding shares. Simons' firm, John Rogers (Trades, Portfolio), Robert Olstein (Trades, Portfolio), John Hussman (Trades, Portfolio), Barrow, Hanley, Mewhinney & Strauss, Joel Greenblatt (Trades, Portfolio) and Paul Tudor Jones (Trades, Portfolio) are also shareholders.

G-III Apparel

After selling out of G-III Apparel in the third quarter of 2016, the firm purchased 426,975 shares, giving it 0.11% space in the equity portfolio. During the quarter, the stock traded for an average per-share price of $34.17.

The New York-based clothing company, which manufactures apparel for brands like Guess?, DKNY, Donna Karan, Calvin Klein, Ivanka Trump and Jessica Simpson, has a $1.11 billion market cap and an enterprise value of $1.83 billion; its shares were trading around $24.84 on Tuesday with a price-earnings ratio of 8.13, a price-book ratio of 0.94 and a price-sales ratio of 0.36.

Based on the Peter Lynch chart, the stock appears to be undervalued.

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GuruFocus rated G-III's financial strength 5.3 out of 10. Although the company has sufficient interest coverage, the Altman Z-Score of 2.87 suggests it is under some financial stress.

The company's profitability and growth did not fare as well, scoring a 4 out of 10 rating on the back of a declining operating margin. Regardless, G-III is supported by returns that outperform over half of competitors, consistent earnings and revenue growth, a moderate Piotroski F-Score of 4 and a two-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 6% per year.

Royce & Associates is now the company's largest guru shareholder with 0.87% of outstanding shares. Other top guru investors are Simons' firm, Francisco Garcia Parames (Trades, Portfolio), Jones, Jeremy Grantham (Trades, Portfolio) and Greenblatt.

Bloom Energy

The firm invested in 860,401 shares of Bloom Energy, dedicating 0.10% of the equity portfolio to the holding. During the quarter, the stock traded for an average price of $12.26 per share.

The green energy company, which is headquartered in San Jose, California, has a market cap of $908.52 million and an enterprise value of $1.44 billion; its shares were trading around $8 on Tuesday with a price-sales ratio of 0.26.

GuruFocus estimates the stock has tumbled 48% year to date.

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Bloom Energy's financial strength was rated 2.6 out of 10. It is being weighed down by a low Altman Z-Score of -1.96, which warns the company could be in danger of going bankrupt.

The company's profitability and growth scored a 1 out of 10 rating on the back of negative margins and returns that underperform a majority of industry peers.

With a 3.06% stake, Ron Baron (Trades, Portfolio) is the company's largest guru shareholder. Pioneer Investments (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) also own the stock.

Tradeweb Markets

Royce's firm picked up 253,350 shares of Tradeweb Markets, allocating 0.10% of the equity portfolio to the position. Shares traded for an average price of $41.74 during the quarter.

The financial services company, which is headquartered in New York, has a $9.95 billion market cap and an enterprise value of $9.62 billion; its shares were trading around $45.44 on Tuesday with a price-earnings ratio of 141.60 and a price-book ratio of 2.21.

According to the Peter Lynch chart, the stock is overvalued.

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GuruFocus rated Tradeweb's financial strength 6.4 out of 10, driven by a comfortable level of interest coverage.

The company's profitability and growth did not fare as well, scoring a 2 out of 10 rating. While the net margin and return on assets are outperforming at least half of its competitors, the return on equity is underperforming industry peers.

Daniel Loeb (Trades, Portfolio) is the company's largest guru shareholder with 0.45% of its outstanding shares. Royce's firm holds 0.11%.

Additional trades

Other companies the firm established positions in during the quarter included Mercer International Inc. (NASDAQ:MERC), Postal Realty Trust Inc. (NYSE:PSTL), Eventbrite Inc. (NYSE:EB), Primoris Services Corp. (NASDAQ:PRIM) and Asbury Automotive Group Inc. (NYSE:ABG).

Royce & Associates' $11.06 billion equity portfolio, which is composed of 1,153 stocks, is largely invested in the industrials and technology sectors.

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According to the firm's website, the Royce Premier Fund slightly outperformed its benchmark in 2018 with a return of -10.4%. The Russell 2000 posted a -11% return.

Disclosure: No positions.

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This article first appeared on GuruFocus.