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 categorize into four themes: Turnarounds, Unrecognized Asset Values, Undervalued Growth, and Interrupted Earnings. In this piece, Brendan and Jim Stoeffel discuss an Unrecognized Asset Value stock, and a Turnaround opportunity.

NPK International provides technologically advanced composite mats used in the industrial and energy markets. These mats provide unique characteristics compared to their primary competition of wooden mats. In energy markets, they provide environmentally friendly benefits by helping prevent spills at well heads. In industrial applications, particularly around the development of transmission and distribution (T&D) infrastructure, they provide a much more durable form infrastructure. Think of these mats as being semi-temporary roads associated with the construction of the T&D lines.

NPK International (NYSE: NPKI)
12/31/2024-11/20/2025

Past performance is no guarantee of future results.

We see NPK as a classic example of an Unrecognized Asset Value story. We first became involved when the company had two separate businesses: A Fluids segment that was targeted toward Energy exploration and production, and a much higher return on investment mats segment—which had originally been developed to support its energy business. However, management had also been slowly expanding into industrial production opportunities. Our analysis suggested that this higher return mats business was not receiving an appropriate valuation within NPK’s overall business. As we hope with most of our Asset Play investments, NPK ultimately sold its Fluids business, and the company became a pure play, high margin, high return mats business.

As is often the case with such situations—and despite strong performance in the stock since the sale of its fluids business—we believe that NPK’s shares have still not properly reflected the growth opportunities within the mats business. T&D is essential to support the rapidly growing demand for electricity in the U.S. associated with the build out of AI infrastructure and, to a lesser extent, electric vehicles. We expect strong growth with fairly high incremental margins to drive solid earnings growth with room for multiple expansion.

Something of a rarity in the small-cap space in that it’s a fairly well-known name, Winnebago Industries makes several different brands of RVs and boats, including its legacy Winnebago motor homes, as well as towables, travel trailers, and Chris Craft and Berlinetta boats. The Covid era saw a considerable spike in demand for both Winnebago’s RV and boating end markets. As that demand has subsided over the last few years, however, big ticket consumer items such as RVs and boats have endured a period of destocking inventories and rationalizing production. We believe the industry is at or perhaps past a cyclical bottom and is poised for recovery. For example, management now sees North American RV wholesale at 320,000-340,000 units in 2025 and 315,000-345,000 in 2026, with dealers remaining selective and shipments aligned to retail, indicating that the destock phase is largely behind RVs.

Winnebago Industries (NYSE: WGO)
12/31/2024-11/30/2025

Past performance is no guarantee of future results.

While we are not forecasting a sharp rebound in demand, the company’s recent results suggest improved profitability, cash flow generation, reduced debt, liquidity, and what we think is a healthy business mix—all of which were enough for us to see Winnebago as a prime turnaround candidate. This is especially likely if interest rates continue to fall, affordability increases (which typically happens when rates are lower), and consumer sentiment improves—a combination that we think positions Winnebago for an earnings recovery.

The company’s product refresh should also help attract more consumers into its lifestyle products, whether younger customers or traditional RV owners looking to replace older models. The marine market also appears to be at or near a cyclical bottom, although that area is probably not as far advanced as the RV business. Retail sales remain soft as dealers continue to work down pontoon inventory. Management, however, is managing production and channel inventory tightly, while Barletta and Chris-Craft appear to be sustaining brand health into the eventual recovery.

These bolster our confidence that Winnebago could soon be in a position to return cash to shareholders as the business’s recovery progresses.

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