article , video 08-21-2014

Why Individual Stock Selection Matters in Today's Environment

No matter how expensive the market might be at any given time, there will always be stocks that, to us, are inexpensive on an absolute basis. Portfolio Manager Bill Hench discusses how he's been handling current valuations and what he's been seeing in the way of M&A activity with Principal Dave Gruber


Dave Gruber: We've had this big run. Talk to us about valuations. Are you bullish, are you cautious?

Bill Hench: So no matter when you ask that question, there's always going to be a bunch of stocks that are very expensive, and there's always going to be a lot of stocks that are very cheap. Our job is to find those things that are cheap, but not only the ones that are cheap but the ones that hopefully, someday, will get to that expensive category.

We've taken advantage of the strength in Energy to reduce some of those positions, and as well in Financials. So, as is always the case, the portfolio is in a constant rotation—where we're taking those things that have worked and have given us the good appreciation, taking that money and using it today to buy things that hopefully provide that appreciation going forward.

Dave: So Bill, talk to us about what you've seen in the way of M&A activity in the portfolio this year.

Bill: It's been very quiet, and that is surprising. If you look at the backdrop, you have a tremendous amount of liquidity. There's over a $1.5 trillion in cash on the balance sheets of major U.S. corporations. Companies in our market cap are very well funded as well, probably better than ever. So you would expect consolidation, especially when you throw in the fact that growth is very difficult to come by.

Though it hasn't been a big part of the portfolio, I would expect going forward to see a lot more transactions.

Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the person speaking and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

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