The Small-Cap Opportunistic Value Strategy that we use in Royce Small-Cap-Opportunity Fund invests in companies that Lead Portfolio Manager Brendan Hartman, Portfolio Managers Jim Harvey and Jim Stoeffel, and Assistant Portfolio Manager Kavitha Venkatraman slot into four themes: Turnarounds, Unrecognized Asset Values, Undervalued Growth, and Interrupted Earnings. In this piece, they discuss four key holdings in the portfolio—one Undervalued Growth company, an Interrupted Earnings story, one Unrecognized Asset Value stock, and one Turnaround.

Kavitha Venkatraman: We have held CECO Environmental (Nasdaq: CECO) in the Fund for a few years. The company provides environmental solutions such as air, water, and noise filtration products for industrial end markets. It is a successful turnaround that has morphed into an undervalued growth stock. Historically, CECO earned 70% of its revenue from the Energy market, was highly cyclical, and had volatile margins. The current CEO (who came on board in mid-2020) and CFO (since 2022) have turned CECO into a more diversified business with attractive and stable profitability. Today, only 30% of revenue comes from Energy, and CECO’s entire energy exposure is levered to structural trends such as the energy transition and the robust demand for natural gas. The company also changed its go-to-market strategy to leverage a platform approach and get much closer to customers’ operations. This new approach has enabled CECO to identify natural adjacencies to its products within its customers’ ecosystems and consequently win a greater share of customers’ wallets. Lastly, the current management team has a solid M&A playbook, having bought several small assets that have doubled in size under CECO’s ownership.

While CECO’s stock price reflects this successful turnaround, it does not yet reflect CECO’s long term-term growth potential, its sizeable backlog, and its competitive advantage as a preferred acquirer of small industrial product companies that can scale quicker as part of CECO. We expect its valuation multiples to expand over time, as CECO continues to execute strongly.

Brendan Hartman: I chose Fox Factory Holding (Nasdaq: FOXF), which is a leader in the design and manufacture of premium suspension and related products for specialty sports like mountain bikes and off-road vehicles; their shocks are also on OEM (original equipment manufacturer) vehicles like the Ford Raptor. We see it as an iconic brand with a loyal customer base that ranges from professional athletes to weekend enthusiasts. After a multi-year period of sales and profit growth, its shares declined sharply following a litany of events that included an inventory overhang from the Covid-driven demand spike for bicycles, a new CEO following the retirement of a long tenured and well regarded chief, an acquisition of a baseball products company that investors disliked as it was outside the core business (and also called the growth outlook for the core business into question), and a series of disappointing earnings results. Further, higher interest rates negatively impacted Fox Factory’s specialty vehicle business, while tariff impacts were another negative headwind. The result was a stock price decline from more than $150 per share to a current price of around $25 as earnings were cut in half and growth investors exited the stock. This put Fox Factory in our “Interrupted Earnings” stock category, with the shares trading below 1x sales from the peak of over 5x sales several years ago. We can see a pathway to a higher share price as the inventory overhang has largely run its course, and management is focused on returning the business to growth through various restructuring initiatives.

Jim Harvey: I think IAC (Nasdaq: IAC) is an interesting position. It’s a holding company that builds and operates category-leading internet businesses. Over the last 30 years, IAC has built and spun out 10 independent public companies. The recent spin-off of Angi in Q1 2025 is the latest example of this “build-to-spin” strategy. The company is led by Barry Diller, who continues to focus on opportunistic capital deployment. IAC currently trades at a deep discount to the underlying value of its overall assets. Measuring the value of IAC’s stake in MGM plus the cash on its balance sheet, we think the public market is assigning zero or negative value to the remainder of IAC’s wholly owned businesses, including:

• Dotdash Meredith, which generated more than $1 billion in annual digital revenue and $309 million last 12 months (LTM) adjusted EBITDA, or earnings before interest, taxes, depreciation & amortization
• Care.com, which generated $366 million in LTM revenue and $43 million in LTM Adjusted EBITDA
• IAC’s Search businesses, Daily Beast, and other assets
• Real estate (notably IAC’s HQ building)
• IAC’s 32% equity interest in Turo, a peer-to-peer car sharing marketplace that reported $958 million in revenue in 2024 and has been profitable since 2021.
• In addition, IAC has more than $800 million+ in net operating losses that can offset taxes on appreciated assets like MGM.

This negative implied value essentially means investors are getting all of IAC’s operating businesses and strategic holdings for free. We expect IAC to continue to monetize assets and deploy capital for the benefit of shareholders, thus leading to an improved share price.

Jim Stoeffel: I like the turnaround potential for Advanced Auto Parts (NYSE: AAP), which is a leading distributor of aftermarket automotive products for both do-it-yourself (DIY) and professional installers. The company competes in a very attractive industry that has significantly consolidated while benefiting from the ongoing aging of the U.S. automative fleet that requires increased repair and maintenance. As testament to the attractiveness of the industry, its two largest competitors, AutoZone and O'Reilly Automotive, generate EBIT (or earnings before interest & taxes) margins approaching 20%. While both have scale advantages versus Advance Auto Parts, we see room for a solid third player in the industry and believe the company is significantly underperforming its potential with low single digit margins.

The new management team is in the early stages of attempting a turnaround and has followed a playbook with a history of success. Non-core assets have been divested, and management has streamlined its distribution infrastructure while focusing closely on driving internal improvements in store operations. The divestiture of non-core assets has helped shore up the balance sheet, though the company still carries a fair amount of debt which we view as a key investment risk. Smaller-company turnarounds are always challenging, but we don’t view management’s intermediate operating margin of 7% as overly ambitious given the profitability of its key competitors. Such an improvement would lead to significant increases in earnings power. Given the stock’s near-historic lows in its price-to-sales valuations, we view the risk/reward characteristics as highly attractive.

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