By Eric Winter
Chuck Royce, President and Co-Chief Investment Officer of Royce & Associates, is no newcomer to investment management, possessing almost half a century of experience in the field. Maintaining his current position at Royce & Associates since 1972, Mr. Royce is known predominantly for finding success in small-cap stocks, picking up performers that are relatively undervalued according to his analysis. We have done our own analysis on the most popular small-cap stocks owned by hedge funds and have uncovered a surprising, market-beating strategy based on the list (read more about this phenomenon here). Royce's most recent 13F filing became available at the start of this month. Among other things, the document shows that he initiated fifty-three new positions in the fourth quarter of 2013. The five we are profiling here are his largest new purchases, and true to his typical investing mantra, they have sub-$5bn market caps.
First on our list is broadcasting company Saga Communications (NYSEMKT:SGA). The stock was an outperformer when looking back the past twelve months, gaining 46% despite a number of earnings misses (one to the tune of -26%). Coverage on this small cap is almost non-existent on Wall Street, once again hinting that the fund that does its own research can see abnormal profits if positive calculations are identified and materialize. Naturally for a stock this small, financial calculations based on historical numbers hold less weight than the potential that an analyst can derive or speculate, which can lead to a sudden or emotional push up (or down) in stock price. Billionaire Jim Simons joins Royce in holding SGA, with almost $3mm invested (view his funds other small-cap holdings here).
Coming in at a market cap of $1.8bn, Alere, Inc. (NYSE:ALR) occupies the next spot on our list, only snagging 0.02% of Royce's assets. Unlike SGA, ALR has decent analyst coverage, with most weighing in to rank the company as a hold (many firms like Wedbush and Capstone Investments dropped their previous buy ratings to hold in the past few months). ALR gave a negative return in the last year despite a majority of positive earnings announcements relative to estimates. Forecasting future value in the stock, nine brokers weighed in to give an average one year price target of $25.39 for the stock, indicating a possible 19% in upside from current levels. SAC Capital Advisors, headed up by billionaire Steven Cohen, recently took on a $21mm view on ALR (see his other initiations here).
Bank holding company BankUnited, Inc. (NYSE:BKU) also found its way into Royce's portfolio and possesses the largest market cap of $2.6bn, relative to the rest of our list of course. The company recently reported Q4 2012 earnings at the end of last month, continuing the tradition of consistent positive surprises by 6% or more. The announcement gave promise in terms of growth, where both revenue and earnings saw appreciation relative to the same quarter a year prior. In addition to these great financials, BKU pays out a dividend yield of 3.1%, making this investment promising and rewarding in more ways than one. Ken Griffin of Citadel Investment Group disagrees with Royce, however; he recently upped his put option position and traded out of over half of his stock position.
VIVUS, Inc. (NASDAQ:VVUS) is a $1.4bn biopharmaceutical company and next on our list. The company recently hit some bad news coming in the form of a negative review from a European regulating agency known as the Committee for Medicinal Products for Human Use [CHMP]. They declared VIVUS' obesity drug Qsiva to have too many risks associated with long-term use and misuse. However, the American counterpart of the drug (Qsymia) is already readily available stateside, approved by the FDA in July 2012 and netting positive results in research studies. The stock is still struggling to get out of its negative earnings phase, but its performance in the past twelve months was at least positive, matching the gain of the S&P500. Richard Chilton owns over $50mm in the stock through his fund, the Chilton Investment Company.
Last on our list of Royce's new holdings is IPC The Hospitalist Company, Inc. (NASDAQ:IPCM). The company operates and manages full-time hospitalist practices. IPCM performed well this past year, slightly doubling the 13% return given by the market, although some overheating may have taken place. Analysts have been tepid on the stock, configuring a lower future price target than what it is currently trading at. Despite this, IPCM reported over 20% growth in earnings year or year in their last earnings announcement, and they are slated to report Q4 2012 earnings on the nineteenth of this month. Bill Miller of Legg Mason Capital Management recently bought 77,000 shares of the equity, totaling roughly $3.5mm of his fund's assets.