Whitney George, co-manager of Royce Low-Priced Stock Fund, Likes Gold and Metals Stocks
Royce Low-Priced Stock Fund (RYLPX) seeks long-term capital appreciation by investing in small-cap and micro-cap companies trading at less than $25 per share. The fund is based on the premise that most institutional investors, such as mutual funds and pension funds, do not usually invest in companies trading at low prices because of the impact that their trading can have on such a company’s share price. Thus, having a focus on this space may provide investment opportunities not available in shares trading at higher price points.
As with all of the Royce funds, Low-Priced Stock Fund uses a value approach. To sum up the goal in one sentence, co-managers Whitney George and James Skinner look to buy companies below what they believe a knowledgeable buyer might pay to acquire the company (its enterprise value). Some of the factors the duo like to see in a candidate include a strong balance sheet, high internal rates of return, and an ability to generate material free cash flow. Strong historical track records and strong future prospects are also important. Interviews with senior management, customers, and competitors help round out their assessment.
Over the last 12 months or so, the fund has materially lagged Value Line’s Small Company Objective group. However, it isn’t surprising for a fund that is tilted toward value to underperform over shorter periods of time. Nor is this type of near-term showing unusual for Royce Low-Price Stock Fund. In fact, several times in the last 15 years it has been in the “dog house” for a year or two only to launch to the “penthouse” for several years running. While this behavior makes for a relatively volatile fund, it has also led the fund to outperform its objective group over the trailing 5-, 10-, and 15-year periods. This is true despite the drag incurred by the fund’s recent underperformance.
Co-manager Whitney George recently discussed the fund and where he is seeing value lately. Although he stresses that every holding is selected from the ground up using Royce’s fundamental approach, he has seen the best bargains in cyclical areas such as energy and precious metals. In fact, he notes that he hasn’t seen “the kind of values that we've seen recently since late 2008 or early 2009.” That’s a pretty bold statement.
The co-managers have been positioned toward hard assets, such as energy, materials and industrial stocks, for a while. Although selected from the bottom up, they are all “an after-the-fact macro bet” that developed countries are going to continue debasing their currencies as a way of dealing with the current global debt crisis.
Although left unsaid, debasing of one’s currency can lead to serious long-term dislocations in an economy and result in increased demand for so-called “hard assets.” Gold is, perhaps, the most obvious store of value for many investors. While it has run up materially over the last several years, George notes that gold has corrected almost 20% four times in the last six years, including this year. Mining stocks, he explains have reacted disproportionately to the issues driving the price of gold.
The recent correction has allowed George and co-manager Skinner to add some new names and build on existing positions—some of which had fallen from their highs by 60% to 70%. Despite that type of drop, which is disquieting to say the least, the co-managers still see companies with strong returns on capital and plenty of cash on their balance sheets. George states that, “they screen very well by the metrics that mean the most to us when we look at a business.”
Royce Low-Priced Stock Fund is closed to new investors, but that doesn’t mean others can’t benefit from George’s thoughts and selections. A few of fund’s larger holdings in the metals and mining space include:
Allied Nevada Gold Corp. (ANV)
Allied Nevada Gold engages in the acquisition, exploration, evaluation, and development of gold projects in Nevada. The company operates under three segments: Hycroft Mine, Exploration properties, and "Other". The Hycroft Mine operating segment contains the exploration and operational activities at the wholly-owned Hycroft mine in Nevada. The exploration properties segment contains the exploration and development activities on the remaining mineral properties owned by the company. The "Other" operating segment primarily contains the corporate overhead functions. Allied Nevada also owns the Maverick Springs, Mountain View, Hasbrouck, Three Hills, the Pony Creek/Elliot Dome, and Wildcat projects. In March 2012, Allied Nevada announced that it awarded a contract to Fluor Corporation to complete the engineering and remaining procurement activities for the Hycroft Expansion Project. Internet: http://www.alliednevada.com.
Pan American Silver Corp. (PAAS)
Pan American Silver engages in the exploration for, and acquisition, development, and operation of, silver properties. The company owns and/or operates the Quiruvilca silver mine, the Huaron silver mine, and the Morococha silver mine in Peru; the La Colorada and Alamo Dorado mines in Mexico; Manantial Esejo & Navidad in Argentina; and San Vicente in Bolivia. Pan American also either holds an interest in or may earn an interest in nonproducing silver resource and silver exploration properties in Argentina and the United States. Internet: www.panamericansilver.com.
Globe Specialty Metals, Inc. (GSM)
Globe Specialty Metals, together with its subsidiaries, produces silicon metal and silicon-based alloys. The company's principal product, silicon metal, is used as a primary raw material in making silicone compounds, aluminum, and polysilicon. This silicon-based alloys, used as raw materials in making steel and ductile iron, are divided into four general categories: ferrosilicon, magnesium-ferrosilicon-based alloys, ferrosilicon-based alloys, and calcium silicon. Globe Specialty produces the majority of the silicon metal for three industries: aluminum; chemical; and photovoltaic (solar)/semiconductor. It operates in the United States, Brazil, Argentina, the People's Republic of China, and Poland. Internet: http://www.glbsm.com.
The above companies span beyond just gold and provide investors a starting point for further research. For Value Line subscribers seeking a deeper dive, Globe Special Metals and Allied Nevada Gold are covered in The Value Line Investment Survey – Small and Mid-Cap Edition, while Pan American Silver is covered in the flagship Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.