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Billionaire Chuck Royce’s Most-Loved Small-Cap Value Picks For Q4

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Royce & Associates is a renowned New York-based value-focused equity mutual fund founded by billionaire Chuck Royce in 1972. Since its inception, Mr. Royce, who holds an MBA from Columbia University, has remained the CEO of the firm. Royce & Associates generally invests in small and micro-cap companies using value investment principles and most of the time holds on to its investments for multiple years. The fund recently submitted its 13F filing with the Securities and Exchange Commission (SEC) for the reporting period of September 30. According to the filing, Royce & Associates’ U.S equity portfolio at the end of September was worth $18.86 billion, which was a 20% drop from the $23.67 billion that it was worth at the end of June, owing to the particularly turbulent third quarter for small-cap equities. The filing also revealed that Royce & Associates’ equity portfolio had a miniscule quarter-over-quarter turnover of 12.58%, which stresses the above point of his long-term conviction in his stock picks. In this article, we will take a closer look at the fund’s top five stock picks going into the fourth quarter.

We track hedge funds and prominent investors because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 50 most popular large-cap stocks among hedge funds had a monthly alpha of about six basis points per month between 1999 and 2012; however the 15 most popular small-cap stocks delivered a monthly alpha of 80 basis points during the same period. This means investors would have generated 10 percentage points of alpha per year simply by imitating hedge funds’ top 15 small-cap ideas. We have been tracking the performance of these stocks since the end of August 2012 in real time and these stocks beat the market by 53 percentage points (102% return vs. the S&P 500’s 49% gain) over the last 38 months (see the details here).

Chuck Royce
Chuck Royce
Royce & Associates

#5 Ritchie Bros. Auctioneers (USA) (NYSE:RBA)

– Shares Owned by Royce & Associates (as of September 30): 7.15 Million

– Value of Holding (as of September 30): $185.04 Million

After selling off 15% of its stake in Ritchie Bros. Auctioneers (USA) (NYSE:RBA) during the second quarter, Royce & Associates sold off another 15% of it during the third quarter, relegating Ritchie Bros. Auctioneers (USA) (NYSE:RBA) to its fifth-largest equity holding. Shares of Ritchie Bros. Auctioneers have remained range-bound throughout 2015; although they tried twice to break the $30 mark this year they weren’t able to do so convincingly and currently trade nearly flat for the year. Despite the stock of the company not making any noteworthy movement, its popularity among hedge funds saw a noteworthy increase during the third quarter. The number of hedge funds tracked by Insider Monkey that reported a stake in the company climbed to 24 as of the end of September, from just 15 as of the end of June. Among the hedge funds that initiated a stake in the company during the third quarter was Paul Marshall and Ian Wace‘s Marshall Wace LLP, which bought 139,006 shares of the company during that period.

#4 Cal-Maine Foods Inc (NASDAQ:CALM)

– Shares Owned by Royce & Associates (as of September 30): 3.5 Million

– Value of Holding (as of September 30): $191.8 Million

Though Royce & Associates trimmed its stake in Cal-Maine Foods Inc (NASDAQ:CALM) by 2% during the third quarter, the 5.2% rise of the stock during the period helped it climb six spots quarter-over-quarter to become the fund’s fourth-largest equity holding. Thanks largely to the spike Cal-Maine Foods Inc (NASDAQ:CALM)’s stock saw after reports emerged of an outbreak of avian influenza in the U.S Midwest, it is currently trading up by 40% year-to-date. On October 20, analysts at Stephens downgraded the stock to ‘Equal Weight’ from ‘Overweight’. Daniel Gold‘s QVT Financial more than doubled its stake in the company to 469,800 shares during the July-to-September period.

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