The Small-Cap Opportunistic Value Strategy that we use in Royce Small-Cap-Opportunity Fund invests in companies in which Lead Portfolio Manager Brendan Hartman, Portfolio Managers Jim Harvey and Jim Stoeffel, and Assistant Portfolio Manager Kavitha Venkatraman have identified a catalyst for future earnings growth in the form of new management, a more favorable business cycle, product innovation, and/or margin improvement. In this piece, Kavitha and Jim focus on two holdings that have earned their long-term confidence.

Amentum Holdings (NYSE: AMTM), the world’s second largest provider of government services, was formed through the merger of AECOM’s management services business and Jacobs’s government services units. Today, 80% of Amentum’s revenue comes from the U.S. government with the rest coming from international markets and commercial customers.

When we began to invest in Amentum earlier this year, it was a new, relatively unknown public company with a highly levered balance sheet that traded at an 11% free cash flow (FCF) yield, which was much cheaper than its peers. Investors were not yet giving credit to Amentum’s expanded scale, higher than market growth potential, synergy potential as a combined entity, massive backlog, and low capital intensity. We believed that Amentum, with its strong free cash flows, could rapidly reduce its debt, after which it could start returning cash to shareholders. During the short time that we have held the stock, both the synergy capture from the merger and the reduction in debt come more quickly and at higher rates than many were expecting—and the stock has started reacting positively.

Amentum Holdings (NYSE: AMTM)
12/31/24-11/28/25

Past performance is no guarantee of future results.

Looking forward, we expect organic growth to accelerate over the next couple of years and outgrow its markets. Amentum’s advance will likely be driven by a) an improved order win rate, b) healthy growth in international markets, and c) cross-selling enabled by its expanded capabilities post the Jacobs merger. We also anticipate significant margin expansion over the next few years, spurred by a positive mix shift towards its commercial end markets—which is a small portion of its business today but carries higher margins than the company’s current average margins. We also expect Amentum’s multiple to expand, reflecting the higher-than-market growth, improved margins, and lower financial leverage. We plan on staying invested in until Amentum’s share price reflects our estimate of fair value.

Mayville Engineering (NYSE: MEC) is a U.S.-based contract manufacturer, providing a broad range of prototyping and tooling, production fabrication, coating, assembly, and aftermarket services. The largest fabricator in the U.S., Mayville operates 26 plants across nine U.S. states. Manufacturing is 100% domestic and roughly 92% of the direct materials the company uses are sourced domestically. Contract pricing passes tariffs through, which helps insulate earnings before interest, taxes, depreciation and amortization, or EBITDA, while OEMs (original equipment manufacturers) reshore and consolidate suppliers.

Mayville has been quietly pivoting from the cyclical heavy vehicles and agricultural industries toward data center/critical power (DC/CP) infrastructure after acquiring Accu-Fab in 2025. New CEO Jag Reddy, whose experience includes stints at Danaher, ITT/Xylem, Pentair, and W.R. Grace, has been pushing lean manufacturing programs and value-based pricing while reorienting the company’s commercial funnel to DC/CP. The team booked $30 million of DC/CP awards in 3Q25, including cross-sell wins for battery-backup cabinets, power distribution units, static transfer switches, and busway components.

Mayville Engineering (NYSE: MEC)
12/31/24-11/28/25

Past performance is no guarantee of future results.

All of these are higher margin programs. Management expects DC/CP to approach around 20% of sales in 2026, with bid-to-revenue cycles as short as 8-12 weeks, which is much faster than legacy programs. Many of Mayville’s legacy end-markets are weak: Class 8 Commercial Vehicle (CV) business has been guided down by close to -28% in 2025 and another roughly -14% for 2026, but the company is actively redeploying capacity and headcount out of six CV-focused plants into DC/CP work. That’s been painful in 2025, but this move accelerates the mix shift to higher-margin, higher-velocity programs that can re-rate consolidated margins as they ramp in the first half of 2026.

Management is running a fairly simple playbook: Lean operations, price discipline, and thoughtful capital deployment. Mayville launched a footprint optimization in early August to consolidate three warehouses and one manufacturing facility by the end of 2026, a total charge that will run somewhere in the neighborhood of $5-$7 million. Near-term charges flow through the costs of goods sold, but the objective is fixed-cost relief and better utilization aligned to DC/CP growth.

3Q25’s free cash flow (FCF) was negative on non-recurring costs and the Accu-Fab close, but management reiterated their expectation of positive FCF in 4Q25, along with a plan to use the cash to pay down debt. Mayville’s net leverage was 3.5x at the end of September, management has targeted less than or equal to 3.0x by year-end 2026. CapEx remains contained ( ~$15–20 million in 2026) because more than 90% of the assets required to execute wins are in place. We expect the market to take notice as Mayville executes on its plan in 2026.

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