Market Monitor: Jay Kaplan

Jay Kaplan, Co-Portfolio Manager of the Royce Dividend Value Fund

Macro overview—with the caveat that no one knows for sure what’s coming next, here’s what we know now:

The Russell 2000 Index is near a 10% correction.

The U.S. economy is strong, and interest rates are rising—both are positive relative signs for small-cap value

About 30% of the companies in the Russell 2000 are non-earners

The R2K has been led by these non-earners—primarily in Health Care and Tech.  The correction has not changed this leadership.

Lofty valuations for these stocks are still  supported by low interest rates but continued rate increases will add to the valuation risk

The result? Dominant performance by the Russell 2000 Growth Index over the Russell 2000 Value Index for the last two years

So the bigger risks remain in small-cap growth while the better opportunities are in small-cap value—where the valuations are not nearly as stretched

Theme—Opportunities in Undervalued Small-Cap Tech

The market is very worried about a protracted cyclical downturn for semiconductor capital equipment and related businesses,

We have a contrarian view: next down cycle will not be as long or as deep as previous cycles due to the high rate of adoption and pervasiveness of new technology.

Stock Picks

3 Tech Names

Insight Enterprises (Nasdaq, NSIT)—Global value-added reseller, both hardware & software

Several large customers, including Microsoft, which is ~25% of its business

Increasing demand not only for hardware and software, but also services and consulting on key areas such as cloud storage and cybersecurity

We see attractive valuation—trades at about 11x earnings

Vishay Intertechnology (NYSE, VSH)—makes  discrete semiconductors and passive electronic components

Its low-level components are in short supply due to growing demand

We think this demand should last through 2019, as demand for these products in the industrial and automotive industries is very strong

We like its dividend 1.9% yield and that it trades at about 9x earnings

Electro-Scientific Industries (Nasdaq, ESIO)—manufactures machines for drilling holes into and marking chips with lasers

Turnaround opportunity—new management has track record of success in turnarounds

We think current slowdown in its core business should be temporary

Current valuation looks very attractive—trades at about 7x earnings

 

Royce Funds owns holdings in NSIT, VSH & ESIO

 

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