Royce fund names three ‘core’ IT stocks from its portfolio worth watching

As the Magnificent Seven stocks benefit from the AI boom, shares of smaller companies are volatile, which makes them more attractive for long-term investors, argues Joe Hintz, a portfolio manager at the Royce Small-Cap Total Return Fund (which primarily invests in small-cap stocks that pay dividends). In a blog post, he highlighted three “core” small-cap holdings .

Coherent  

Coherent, with a market capitalization of $13.5 billion, develops materials, lasers, and sensors for the electronics and medical industries, among others. For example, its sensors are used for smartphone facial recognition and to scan the surrounding environment in AR applications. Recently, nearly all of Coherent’s markets have been at cyclical bottoms and are now returning to growth phases, says Hintz. He notes that since the beginning of the year through mid-July, the share price nearly doubled to $80.50. Against this backdrop, the fund reduced the size of its position in Coherent, “taking advantage of upside volatility while waiting for the longer-term story to play out,” Hintz explains.

Kulicke & Soffa  

Kulicke & Soffa, with a market capitalization of $2 billion, has a majority share of the market for ball bonder equipment (used in the back-end packaging portion of the semiconductor manufacturing process). Hintz describes the business model as high-quality, and its financials as great. In the fiscal-2024 third quarter, the company’s net revenue decreased almost 5% year over year to $181.7 million, while earnings per share for the same period rose more than threefold to $0.22. The market where Kulicke & Soffa operates is in a long-lasting cyclical downturn, notes the Royce portfolio manager. The stock is down more than 16% over the last year. Taking advantage of this, the fund increased its position in Kulicke & Soffa, waiting for the downturn to end, Hintz says.

Hackett Group  

Hackett Group, with a market capitalization of $723 million, provides consulting services to improve productivity. It has developed a tool that assesses a business’s readiness to implement AI technologies and identifies areas where AI could be beneficial. Hintz believes that though AI could impact the consulting sector, Hackett Group has an “even greater opportunity” to lean into and monetize the differentiated data asset it has been building over decades, with the chance to significantly boost Hackett’s profitability. Revenue in the second quarter of 2024 came in at $77.7 million, basically flat year over year, while earnings per share decreased 3% to $0.31. Over the last 12 months, the stock is up more than 14%.