article , video 09-25-2014

Current Turnaround Candidates

Portfolio Manager Bill Hench gives Principal Dave Gruber current examples of his portfolios' turnaround themes: emerging growth companies with interrupted earnings patterns, companies with unrecognized asset values, and undervalued growth companies.


Dave Gruber: Could you give us an example of a stock in each of those four themes?

Bill Hench: A broken IPO would be a company like Audience, which is a maker of video and audio processors. It's a company that came public with a lot of fanfare, a very good investor base, and came public at about $17 a share. People were not encouraged by what they saw after the first couple of quarters and their earnings and the stock dropped to about probably $10. What we saw in it was a company that was going to grow again at 20%. It had half of its market cap in cash and provided really good long-term opportunities, and it's a name that we still hold today.

As far as turnarounds, one of the best that I think we could cite is Dillard's Department Store, which we still have a small position in. But it was a company that didn't spend a lot of time talking to Wall Street but did spend a lot of time fixing some issues to get their margins corrected over a long period of time. And what they did was a lot of changes in the way they merchandised, they did a lot of changes in management, and they were able to really become one of the premier department stores in the U.S. today.

An example of an undervalued growth company for us would be Meritor, which was part of a group of companies that we bought in the commercial vehicle sector. And quite simply put, there was a big consolidation after 2008, and a lot of the parts makers—not just in autos but in the commercial vehicle sector as well—went out of business. The remaining companies were put together and actually got better pricing, and better market share, and better global presences than they had prior to that financial ruin of 2008. It's been a good stock for us, and we continue to hold it.

One of the other names that we like is a company called Radian, which is an asset play. Radian was a mortgage insurer that suffered greatly after the housing crisis. But when we did our work on it, we found that the value of the paper on their balance sheet was significantly understated, especially if you assumed that at some point in the future you would get a rebound in housing, and we have had that rebound.

Important Disclosure Information

Bill Hench is a Portfolio Manager of Royce & Associates, LLC, investment adviser to The Royce Funds. He serves as Portfolio Manager for Royce Opportunity Select Fund (ROS) and Royce Opportunity Fund (ROF). 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.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money

Percentage of Fund Holdings as of 6/30/14 (%)

Audience 0.80 0.21
Dillard's Cl. A 0.00 0.06
Meritor 1.04 0.52
Radian Group 0.00 0.33

There can be no assurance that any of these securities mentioned in this interview will be included in these portfolios in the future. References to specific securities in this video are not intended as recommendations and should not be relied upon as the basis for anyone to buy, sell, or hold any security.



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