Chuck Royce Is Overweight Industrials; Here’s Why

Charles “Chuck” Royce is known as one of the pioneers of small-cap investing since founding Royce & Associates in 1972. The hedge fund uses a value-based approach to invest in companies with small market capitalizations. As of the end of the third quarter, Royce & Associates manages a $15.19 billion 13F portfolio. In a recent interview, Mr. Royce explained in detail why his portfolio consists of so many industrial stocks. Royce said that the industrial sector includes a broad number of categories which even include countries that are “capital-light” and have a B2B model. The 76-year-old investor said that industrials always represent a “great intersection” between quality and value. Royce said that his fund managed to acquire positions in strong global industrial companies at reasonable prices and these stocks have a long way to go.

Chuck Royce rejected the notion that investing in industrials is risky due to the uncertainties that loom large in the international economy. Royce doesn’t see any “true” recession in the future, although he admitted that we could face slowdowns and short-term crises in the economy, like we did in the oil industry recently. Royce is convinced that the industrials sector is a very good area with low expectations where investors can put their money for long-term gains. Answering a question about the volatility in the U.S dollar and how it affected industrials companies last year, Royce said that the dollar didn’t ascend much this year, which makes the overall market position good for the sector, though they remain “low expectation stocks.” Mr. Royce also said that the marketplace does not appreciate the innovation found in the industrials sector. He thinks that major industrials companies are using high-end technology in their production process, and they also make and sell technology solutions to other companies. Now then, let’s take a look at five of the most important industrial stock picks of Chuck Royce as of September 30.

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Cognex Corporation (NASDAQ:CGNX)

Royce & Associates owns 2.66 million shares of Cognex Corporation (NASDAQ:CGNX) as of the end of the third quarter, valued at $140.47 million. During the interview, Chuck Royce specifically mentioned Cognex, expressing appreciation for its innovation and saying that the company dominates the field of machine vision. Royce said that Cognex is a “very great” and “very successful” company with strong long-term prospects. The shares of the Massachusetts-based provider of industrial automation solutions have gained over 91% in value since the start of the year. Earlier this month, Deutsche Bank initiated coverage of Cognex (NASDAQ:CGNX) with a ‘Buy’ rating and $74 price target. Robert Karr’s Joho Capital owns 1.69 million shares of Cognex as of the end of the third quarter.

Ritchie Bros. Auctioneers Inc (USA) (NYSE:RBA)

Royce & Associates sold 21% of its stake in Ritchie Bros. Auctioneers Inc (USA) (NYSE:RBA) in the third quarter, moving into the final quarter of 2016 with about 3.92 million shares of the company worth $137.37 million. The stock is up by over 41% since the start of the year. On Tuesday, Raymond James downgraded Ritchie Bros (RBA) to ‘Market Perform’ from ‘Outperform’, citing a recovery in oil prices, which will damage the company’s sales of its heavy machinery in farming, energy and transportation. The Canada-based industrial auctioneer missed third-quarter earnings estimates by posting EPS of $0.20, while the Street was projecting EPS of $0.21, while revenue for the quarter came in at $128.9 million, versus the consensus estimate of $121.52 million. David E. Shaw’s D E Shaw owns 377,010 shares of Ritchie Bros. Auctioneers Inc (USA) (NYSE:RBA) as of September 30.

On the next page we’ll discuss some more industrial stocks that Chuck Royce is betting heavily on.