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The Top 5 Holdings of Chuck Royce's Firm

GuruFocus.com

According to GuruFocus' top holdings data, Royce and Associates' five largest positions as of the end of the third quarter were Quaker Chemical Corp. (NYSE:KWR), Air Lease Corp. (NYSE:AL), MKS Instruments Inc. (NASDAQ:MKSI), Ares Management Corp. (NYSE:ARES) and Hubbell Inc. (NYSE:HUBB).

The New York-based firm, which was founded in 1972 by renowned investor Chuck Royce (Trades, Portfolio), specializes in small-cap companies. The portfolio managers pick stocks based on an active, bottom-up, risk-conscious and fundamental approach. They also look for value opportunities among companies trading at a discount to enterprise value.


Quaker Chemical

The firm's largest position is 783,123 shares of Quaker Chemical, which represents 1.15% of the equity portfolio. GuruFocus estimates it has gained 145.8% on the investment since the third quarter of 2011.

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The Conshohocken, Pennsylvania-based chemical manufacturing company has a $2.68 billion market cap and an enterprise value of $3.44 billion; its shares were trading around $151.30 on Thursday with a price-earnings ratio of 76.64, a price-book ratio of 2.24 and a price-sales ratio of 2.26.

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

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Quaker Chemical's financial strength was rated 4 out of 10 by GuruFocus. Although the company has sufficient interest coverage, it has a low cash-debt ratio of 0.14. In addition, the Altman Z-Score of 1.84 indicates the company is under some financial pressure.

The company's profitability scored a 7 out of 10 rating, driven by operating margin expansion. While returns underperform more than half of its competitors, Quaker Chemical has a moderate Piotroski F-Score of 4, which implies operations are stable. Its business predictability rank of 2.5 out of five stars is on watch despite recoding consistent earnings and revenue growth. According to GuruFocus, companies with this rank typically see their stocks gain an average of 7.3% per annum over a 10-year period.

With 4.42% of outstanding shares, Royce's firm is by far the company's largest guru shareholder. Paul Tudor Jones (Trades, Portfolio), Mario Gabelli (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Steven Cohen (Trades, Portfolio) also have positions in the stock.

Air Lease

Royce's firm owns a 2.86 million-share stake in Air Lease, representing 1.11% of the equity portfolio. According to GuruFocus, the firm has gained an estimated 33.8% on the investment since the second quarter of 2012.

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The aircraft leasing company, which is headquartered in Los Angeles, has a market cap of $5.10 billion and an enterprise value of $18.56 billion; its shares were trading around $45.44 on Thursday with a price-earnings ratio of 9.2, a price-book ratio of 0.94 and a price-sales ratio of 2.66.

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

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GuruFocus rated Air Lease's financial strength 3 out of 10. As a result of issuing approximately $5.3 billion in new long-term debt over the past three years, the company has poor interest coverage. The low Altman Z-Score of 0.7 warns the company is in financial distress and could be at risk of going bankrupt.

The company's profitability fared better with a score of 7 out of 10. Although the operating margin is expanding and is supported by moderate returns, Air Lease's Piotroski F-Score of 3 suggests it has poor business conditions.

Royce's firm is the company's largest guru shareholder with 2.54% of outstanding shares. Ron Baron (Trades, Portfolio), Jerome Dodson (Trades, Portfolio), the Signature Select Canadian Fund (Trades, Portfolio) and Jones also own the stock.

MKS Instruments

The investment firm's third-largest stake is 1.15 million shares of MKS Instruments, which makes up 0.99% of its equity portfolio. GuruFocus estimates the firm has gained 59.15% on the investment since the fourth quarter of 2014.

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The Andover, Massachusetts-based company, which provides instruments, subsystems and process control solutions that perform a number of functions in advanced manufacturing processes, has a $5.8 billion market cap and an enterprise value of $6.28 billion; its shares were trading around $106.59 on Thursday with a price-earnings ratio of 34.32, a price-book ratio of 2.94 and a price-sales ratio of 3.14.

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

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MKS Instruments' financial strength was rated 6 out of 10 by GuruFocus. In addition to adequate interest coverage, the company is supported by a high Altman Z-Score of 4.18, which suggests it is in good financial health.

The company's profitability fared even better, scoring an 8 out of 10 rating on the back of operating margin expansion and strong returns that outperform over half of its industry peers. The low Piotroski F-Score of 3 indicates it has poor business operations. In addition the one-star business predictability rank is on watch as a result of declining revenue per share over the past 12 months. GuruFocus says companies with this rank typically see their stocks gain an average of 1.1% per year.

Of the gurus invested in MKS Instruments, Royce's firm has the largest position with 2.17% of outstanding shares. Other guru shareholders include Jim Simons (Trades, Portfolio)' Renaissance Technologies, Ken Fisher (Trades, Portfolio), Cohen, Pioneer Investments (Trades, Portfolio), First Pacific Advisors (Trades, Portfolio), the FPA Capital Fund (Trades, Portfolio) and Greenblatt.

Ares Management

The firm has a 3.89 million-share stake in Ares Management, which has an equity portfolio weight of 0.97%. GuruFocus data indicates the small-cap specialist has made an estimated gain of 83.2% on the investment since the second quarter of 2015.

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The asset management company, which is headquartered in Los Angeles, has a market cap of $7.62 billion and an enterprise value of $16.24 billion; its shares were trading around $32.92 on Thursday with a price-earnings ratio of 37.86, a price-book ratio of 16.28and a price-sales ratio of 2.38.

The Peter Lynch chart suggests the stock is overvalued.

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GuruFocus rated Ares' financial strength 3 out of 10. As a result of issuing approximately $5.7 billion in new long-term debt over the past three years, the company has poor interest coverage. In addition, the Altman Z-Score of 0.72 warns the company is in distress and could be in danger of filing for bankruptcy.

The company's profitability scored a 5 out of 10 rating, driven by moderate margins and returns that outperform around half of its competitors. Ares also has a moderate Piotroski F-Score of 4.

With 1.68% of outstanding shares, Royce's firm is Ares' largest guru shareholder. Simons' firm, Cohen and Greenblatt also have positions in the stock.

Hubbell

The firm has a 780,212-share holding of Hubbell, which accounts for 0.95% of the equity portfolio. According to GuruFocus, it has made an estimated gain of 40.02% on the investment since the fourth quarter of 2015.

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The Shelton, Connecticut-based company, which manufactures and sells electrical and electronic products for construction, industrial and utility applications, has a $7.97 billion market cap and an enterprise value of $9.52 billion; its shares were trading around $146.73 on Thursday with a price-earnings ratio of 20.79, a price-book ratio of 4.19 and a price-sales ratio of 1.71.

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

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Hubbell's financial strength was rated 5 out of 10 by GuruFocus on the back of sufficient interest coverage and a robust Altman Z-Score of 3.63, which suggests the company is in good standing financially.

Despite having declining margins, the company's profitability scored an 8 out of 10 rating. Hubbell is also supported by strong margins that outperform a majority of industry peers and a moderate Piotroski F-Score of 6. Driven by steady earnings and revenue growth, it also has a 3.5-star business predictability rank. GuruFocus says companies with this rank typically see their stocks gain an average of 9.3% per year.

Once again Royce's firm is the company's largest guru shareholder with 1.43% of outstanding shares. Other top guru investors include Simons' firm, Greenblatt, Scott Black (Trades, Portfolio), Pioneer Investments and Cohen.

Portfolio composition

Royce & Associates' other top holdings as of the quarter ended Sept. 30 were Cabot Microelectronics Corp. (NASDAQ:CCMP), Marcus & Millichap Inc. (NYSE:MMI), Kirby Corp. (NYSE:KEX), Lincoln Electric Holdings Inc. (NASDAQ:LECO) and Standard Motor Products Inc. (NYSE:SMP).

The firm's $10.80 billion equity portfolio, which was composed of 1,150 stocks as of the end of the third quarter, is largely invested in the industrials and technology sectors.

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According to its 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.