Four Key Small-Cap Value Holdings
article 01-30-2024

Four Key Small-Cap Value Holdings

Portfolio Manager Jay Kaplan talks about 4 key small-cap value holdings in the furniture, trucking, and homebuilding industries.


Small-cap stocks—and small-cap value stocks in particular—had a strong 4Q23, with the Russell 2000 Index up 14.0% and the Russell 2000 Value Index up 15.3%, respectively. But there are still attractively valued stocks to be found in certain areas, especially in industries that have seen recessions, where I like searching out well-run companies with strong fundamentals that make them likely to benefit in an industry rebound.

“There are still attractively valued stocks to be found in certain areas, especially in industries that have seen recessions, where I like searching out well-run companies with strong fundamentals that make them likely to benefit in an industry rebound.”
—Jay Kaplan

One area that fits this theme is home furnishings. The industry has been mostly sluggish following a boom during the Covid pandemic, when cocooned consumers were spending more on furniture and other home goods while supply chain issues held up deliveries. In this space, I like Haverty Furniture Companies, which has been in business since 1885 and sells mostly private brand furniture, décor, accessories, mattresses, and bedding. During the pandemic, they focused on more efficiently managing their stores by making their workforce more productive. They also concentrated on having designers in their stores, which usually results in larger customer purchases. Their stores are primarily in the Southeast U.S., which is a region with the kind of steady population growth that is favorable for a furniture business. In 2023, Haverty picked up dead store leases from Bed Bath & Beyond—which was in Chapter 11—in what the company thinks are desirable locations.

So, from an operational perspective, there’s a lot to like about the business. Financially, there is also a lot that I like. Haverty has remained profitable, positing respectable earnings in the face of lower demand—the stock trades at a P/E ratio of around 9.0x, which in my view is attractively low. The company has no debt, generates a lot of cash, and has paid special dividends in five out of the last six years. When its industry recovers, Haverty looks very well positioned to thrive.

In addition to some consumer areas, the industrial economy has also been weak, which has caused depression in the trucking sector, especially companies in less-than-truckload (LTL) transportation. LTL shipping describes freight that requires less than a full truckload trailer. In general, most LTL shipments weigh between 500 and 15,000 pounds, are shipped on pallets, and require only part of a trailer. In this space, I hold ArcBest Corporation, which is primarily an LTL shipper and has a brokerage business that arranges shipments and freight. ArcBest trades at a P/E of around 10.2x 2024 consensus estimated earnings, which compares favorably to its biggest competitors that trade at more than twice that P/E. In addition to the industry’s recession, ArcBest has a unionized workforce, unlike its major competitors. This creates a small structural disadvantage in its margins that I would expect to result in a somewhat discounted stock price —but the difference in P/Es between ArcBest and its competition looks much wider.

The liquidation of Yellow Freight in 2023 created a lot of displacement in the industry. Exactly how much of that ultimately flows to ArcBest remains to be seen against the backdrop of overall weaker demand for trucking companies. However, they are poised to pick up some of the volume from this displacement in addition to the business they will have when demand ticks up again. While I’m not expecting that recovery to occur soon, I suspect we’ll see improved demand in the second half of this year.

Certain companies in the homebuilding industry did well in 2023—but there is still a housing shortage in the U.S. that has not seen much if any improvement over the past 10 years. The Covid period also saw dramatic increases for many raw material input costs—lumber most impactfully—as supply chains were adversely affected. More recently, labor has gotten more expensive, and rising interest rates that led mortgage rates to rise have been another headwind. In this context, many of these companies have given buyers certain incentives.

These inducements historically took the form of upgrades like higher-end cabinets or countertops. In response to recent headwinds, however, many homebuilders have chosen to offer a more direct financial incentive in the form of offering mortgage buydowns, making monthly payments more affordable. There is a question as to how this incentive system may shift if rates fall. Regardless of what if any changes occur, however, the housing shortage is real and will take time to overcome.

I hold four homebuilders—two of which were top contributors in Royce Small-Cap Value Fund in 2023 as well as being top-10 holdings at the end of December: M/I Homes and PulteGroup. M/I Homes builds single-family homes primarily in the Midwest and Southeast U.S. The company has a low-debt balance sheet, steady cash flows, and strong earnings.

Perhaps counterintuitively, M/I received a lift from higher mortgage rates in 2023 as 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. In addition to offering incentives, it has also reacted to headwinds by building smaller homes at lower price points. Despite its impressive performance in 2023, its stock was trading at roughly 8.1x earnings at the end of 2023.

PulteGroup builds homes all over the U.S. and benefited from this same dynamic in 2023. In my view, it is a premier company in its industry, with a management team that has a great record of effective capital allocation and that’s focused on shareholder returns. I also like that it builds a diverse set of homes—entry level, “move-up” homes, and older adult. Like M/I, it was trading at an attractive P/E at the end of 2023—roughly 9.1X—even after an impressive run in 2023.

Important Disclosure Information

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

NET               GROSS
Small-Cap Value 16.03 26.51 13.58 10.25 5.61 9.07 06/14/01  1.24  1.35
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 reflects 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 (%)

  Pennsylvania Mutual Capital Small-Cap Small-Cap Value

Haverty Furniture




ArcBest Corporation




M/I Homes








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.

Return on Invested Capital is calculated by dividing a company’s past 12 months of operating income (earnings before interest and taxes) by its average invested capital (total equity, less cash and cash equivalents, plus total debt, minority interest, and preferred stock).

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.)



Sign Up