Bill Hench: Current Turnaround Candidates by Royce Funds
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, Inc. (NYSE:DDS) 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 Inc (NYSE:MTOR), 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 Group Inc (NYSE:RDN) 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.