Five Small-Cap Value Stocks in Focus
article 03-26-2024

Five Small-Cap Value Stocks in Focus

Portfolio Manager Jay Kaplan talks about 5 small-cap value holdings in industries such as specialty retail, capital markets, and building products.


For both the market and the economy, these are uncertain times. The much commented on ‘last mile’ of inflation is proving much more stubborn than anticipated, pushing out the possibility of interest rate cuts to May at the earliest, while the number of expected cuts in 2024 has fallen from six to three. However, if the rate of inflation does not fall far enough, the Fed has indicated that cuts may not happen this year. In addition, we are in an election year with a highly polarized electorate, which creates uncertainties of its own. Moreover, small-cap value has once again taken a back seat to small-cap growth, while the Russell 2000 Index is behind the large-cap Russell 1000 Index so far in 2024.

In this context, trying to predict which small-cap companies, industries, and/or sectors will perform well over the next 12 months, or longer—which is always a challenge—is even more difficult than usual. I find that the number of holdings in the portfolios that I manage has gone down over the last year as there are fewer attractive companies with great valuations to replace the ones that I’ve sold off.

“I have confidence in all five as businesses—they all trade at low to reasonable valuations and each generates ample cash, making them the kind of companies that should benefit from a more stable market and economic climate.”
—Jay Kaplan

With that said, I’ll discuss five companies with what I think are attractive fundamentals and capable managements. I have confidence in all of them as businesses—and they all trade at low to reasonable valuations and each generates ample cash, making them the kind of companies that should benefit from a more stable market and economic climate.

Shoe Carnival (Nasdaq: SCVL) is a retailer of family footwear. A long-time holding, the company is well-run, has been adding new stores for the first time in several years, and has ample cash. The company has also been putting this cash to work—wisely, in my view—by making discrete acquisitions. In February 2024, Shoe Carnival bought Rogan’s Shoes, a 53-year-old work and family footwear company with 28 stores spread across Wisconsin, Minnesota, and Illinois while in December of 2021, it acquired Shoe Station, which operated in the Southeast U.S. A competitor, which we also hold, has forecasted flat to lower shoe sales for the rest of 2024. This possibility puts Shoe Carnival’s recent strong stock price performance at risk, but I also think that the company can weather any slowdown and would be very well positioned for a rebound. And in spite of a strong 2023, its price-to-earnings ratio was around 11.3x in mid-March, keeping its valuation attractively cheap.

Evercore (NYSE: EVR) is an investment bank whose shares did well in 2023. I like its position as a leader in mergers and acquisitions (“M&A”), as well as its attractive business model and healthy cash flow. Evercore also underwrites Initial Public Offerings and has a capital markets business, both of which are successful, though the M&A business accounts for the bulk of its revenue and profits. This business has been slower than usual recently but should rebound nicely in a recovery. Although its arrival is impossible to predict, I’m happy to hold what I think is an excellent business.

ePlus (Nasdaq: PLUS) is a value-added reseller of computer parts, providing hardware, software, and related services, as well as financing—which is highly profitable. Its businesses benefit from fast-changing technology, especially with the advent of cloud computing, cyber security, and AI. So, while its businesses have remained strong, ePlus has arguably over-earned recently and saw a hiccup in its stock price earlier this year. However, I see it as a terrific ‘picks and shovels’ technology business that is worth holding over the long run.

Quanex Building Products (NYSE: NX) designs and produces energy-efficient window products in addition to kitchen and bath cabinet components. I first began to purchase shares at what I thought were attractively low prices because I see Quanex as a well-run company whose cost structure helps it generate impressive profits and ample cash in spite of a tough environment for its industry. Even after doing well in 2023, its stock trades at what I see as a reasonable valuation for a really good business.

PulteGroup (NYSE: PHM), which builds homes all over the U.S. and was a top contributor to 2023’s strong performance, benefited from higher mortgage rates. Many homeowners put off selling to avoid purchasing a new home at increased rates—which spurred demand for newly built homes for first-time home buyers. I think it’s a premier company in its industry, with a management team that has a great record of effective capital allocation and is focused on shareholder returns. I also like that it builds a diverse set of homes—for entry level, “move-up,” and older adult buyers.

Important Disclosure Information

Average Annual Total Returns as of 12/31/2023 (%)

NET               GROSS
Small-Cap Value 15.95 26.08 13.30 9.96 5.34 8.87 06/14/01  1.49  1.59
Russell 2000 Value
15.26 14.65 7.94 10.00 6.76 8.22 N/A  N/A  N/A
Russell 2000
14.03 16.93 2.22 9.97 7.16 7.88 N/A  N/A  N/A
1 Not annualized.

All performance information reflects past performance, is presented on a total return basis, reflects the reinvestment of distributions, and does not reflect the deduction of taxes that a shareholder would pay on fund distributions or the redemption of fund shares. Past performance is no guarantee of future results. Investment return and principal value of an investment will fluctuate, so that shares may be worth more or less than their original cost when redeemed. Shares redeemed within 30 days of purchase may be subject to a 1% redemption fee, payable to the Fund, which is not reflected in the performance shown above; if it were, performance would be lower. Current month-end performance may be higher or lower than performance quoted and may be obtained at Gross operating expenses reflect the Fund's total gross annual operating expenses and include management fees and other expenses. Net operating expenses reflect contractual fee waivers and/or expense reimbursements. All expense information is reported as of the Fund's most current prospectus. Royce has contractually agreed, without right of termination, to waive fees and/or reimburse expenses to the extent necessary to maintain the Investment Class's net annual operating expenses (excluding brokerage commissions, taxes, interest, litigation expenses, acquired fund fees and expenses, and other expenses not borne in the ordinary course of business) at or below 1.24% through April 30, 2024.

All performance and risk information presented in this material prior to the date of commencement of Investment Class shares on 3/15/07 reflect Service Class results. Shares of the Fund's Service Class bear an annual distribution expense that is not borne by the Investment Class.

Mr. Kaplan’s thoughts and opinions concerning the stock market are solely his own and, of course, there can be no assurance with regard to future market movements. No assurance can be given that the past performance trends as outlined above will continue in the future. The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

Percentage of Fund Holdings As of 12/31/23 (%)

  Small-Cap Value

Shoe Carnival


Evercore Cl. A




Quanex Building Products




Company examples are for illustrative purposes only. This does not constitute a recommendation to buy or sell any stock. There can be no assurance that the securities mentioned in this piece will be included in any Fund’s portfolio in the future.

The Price-Earnings, or P/E, ratio is calculated by dividing a company's share price by its trailing 12-month earnings-per-share (EPS).

Sector weightings are determined using the Global Industry Classification Standard ("GICS"). GICS was developed by, and is the exclusive property of, Standard & Poor's Financial Services LLC ("S&P") and MSCI Inc. ("MSCI"). GICS is the trademark of S&P and MSCI. "Global Industry Classification Standard (GICS)" and "GICS Direct" are service marks of S&P and MSCI.

Frank Russell Company (“Russell”) is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company. Neither Russell nor its licensors accept any liability for any errors or omissions in the Russell Indexes and/or Russell ratings or underlying data and no party may rely on any Russell Indexes and/or Russell ratings and/or underlying data contained in this communication. No further distribution of Russell Data is permitted without Russell’s express written consent. Russell does not promote, sponsor or endorse the content of this communication. The Russell 2000 is an unmanaged, capitalization-weighted index of domestic small-cap stocks. It measures the performance of the 2,000 smallest publicly traded U.S. companies in the Russell 3000 index. The performance of an index does not represent exactly any particular investment, as you cannot invest directly in an index.

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. The Fund invests primarily in small-cap stocks, which may involve considerably more risk than investing in larger-cap stocks. In addition, as of 12/31/23 the Fund invested a significant portion of its assets in a limited number of stocks, which may involve considerably more risk than a more broadly diversified portfolio because a decline in the value of any of these stocks would cause the Fund’s overall value to decline to a greater degree.(Please see "Primary Risks for Fund Investors" in the prospectus.) The Fund may invest up to 25% of its net assets in foreign securities (measured at the time of investment), which may involve political, economic, currency, and other risks not encountered in U.S. investments. (Please see "Investing in Foreign Securities" in the prospectus.)



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