How Whitney George of the $3.9 billion Royce Low-Priced Stock Fund finds shares that outpace the market
We like small-cap stocks selling for less than $25 a share because many are ignored by sophisticated investors. Wall Street analysts are reluctant to recommend low-priced stocks, and some institutions aren't permitted to own shares that sell for less than $10 or $15. So as stocks reach low levels, selling pressure can push prices below fair values. After they hit bottom, these shares can snap sharply upwards. Our aim is to buy stocks that can double or triple in three to five years. Make no mistake, they are risky. They sink because something's gone wrong—earnings may have been disappointing or the industry fell out of favor. We stick with companies that have sound balance sheets and long histories of healthy returns on equity. We especially like companies that can grow for years by expanding existing operations or by making new acquisitions.
George on his plays:
1. Fairchild Semiconductor
Demand for semiconductors is rising as manufacturers install more of them into washing machines, cars, and lighting fixtures to control use of power. Fairchild's (FCS) shares are depressed because investors view its industry as a cyclical one that can tank when the economy sinks. The company should prove relatively steady as more manufacturers begin installing chips and demand grows for consumer products in emerging markets. Fairchild can withstand setbacks: Its balance sheet is sound.
A Canadian money management firm, Sprott (SPOXF) runs mutual funds and institutional accounts that specialize in natural resource investing. The company's shares crashed in 2008 as fund clients became wary of investing in stocks. Yet money management remains a profitable business because companies receive steady fees that are a percentage of the assets they manage. Sprott's performance has been sound, and it should prosper as investors gradually return to stocks.
3. Hochschild Mining
Hochschild (HOC) seems likely to deliver growing profits. It spends less than $7 to produce an ounce of silver, which is low at a time when the metal is selling for $24 an ounce. Hochschild has acquired undeveloped properties at low prices, and new discoveries in Chile and Argentina could boost earnings. Silver prices should remain firm because the U.S. and other countries are rushing to print money. That will weaken currencies and increase the value of an ounce of precious metal.
4. Trican Well Service
Oil and gas companies are drilling in areas once considered too difficult to exploit. Trican (TOLWF) provides a state-of-the-art service known as fracturing in which drillers inject pressurized fluids into sand and rock formations, allowing the hydrocarbons to reach wells. As a Canadian company, Trican has an edge over U.S. rivals. Canada has long had tough safety standards. Since the BP (BP) spill, drillers have been seeking service companies with records of meeting tough safety demands.
The Stats: W. Whitney George has run the $3.9 billion Royce Low-Priced Stock Fund (RYLPX) since 2000. Over 10 years the fund's annualized 10.6 percent return has outpaced the S&P 500. The blend fund currently tilts toward growth.