Royce reveals top small-cap investment ideas for 2025

Fund managers at Royce, founded by Wall Street legend Chuck Royce and known for specializing in small- and mid-cap stocks, have shared investment ideas for 2025, including consumer durable names and discounters.

Consumer durable products

Royce fund managers are keen on companies that sell consumer durable products, such as RVs and residential pools.

The deregulation and corporate tax cuts promised by U.S. President-elect Donald Trump may boost consumer confidence and, if inflation is contained, revive big-ticket consumer spending, explains Lauren Romeo, a portfolio manager at the Small-Cap Premier Fund, which invests in small caps with low debt and stable cash flows.

Romeo points out that consumer durable product manufacturers got a boost from the pandemic but later faced declining sales. She attributes this decline to a shift in consumer spending from goods to services, such as travel and entertainment, as well as the persistence of higher interest rates from 2020 to autumn 2024.

“Based on our conversations with the management teams of the affected companies we own, as well as related players across their industry supply chains, demand appears to have hit a bottom,” Romeo notes.

She also points to the fact that RVs and powerboats sold during the pandemic are nearing the five-year ownership mark — a point when consumers tend to replace or upgrade them — as another sign of an imminent rebound in consumer durable product demand.

Francis Gannon, co-CIO of one of Royce’s earliest funds, the Small-Cap Fund, highlights three companies that may benefit from a pick-up in consumer demand:

— LCI Industries, through its subsidiary Lippert, makes products for the outdoor recreation and transportation markets, including pop-up roofs for RVs, windshields, and boat awnings. According to MarketWatch, the company’s stock has three “buy” ratings, five “holds,” and three “sells,” with an average target price of $117.80 per share, implying upside of more than 13%.

— Brunswick Corporation brands itself as a global leader in marine recreation. It manufactures boats and parts for them, such as propellers, outboard motors, and onboard electronics (echo sounders and digital navigation systems). According to MarketWatch, out of the 20 analysts covering Brunswick, nine have a “buy” recommendation, while 11 rate it a “hold.” Their average target price is $87 per share, a third higher than current levels.

— Pool Corporation is a distributor of swimming pool products, including parts, chemicals, tiles, and more. It also owns a golf course irrigation company. According to MarketWatch, the stock has four “buy” ratings, six “holds,” and two “sells,” with an average target price of $382.40 per share, implying upside of almost 10%.

Discounters

Royce fund managers are also fond of companies catering to middle- and lower-income consumers. This group was likely hit the hardest by high inflation and interest rates, points out portfolio manager Miles Lewis. He believes 2025 could mark a shift in spending, with one potential beneficiary:

— Academy Sports & Outdoors is a sporting goods retailer. According to MarketWatch, among coverage analysts there are 10 “buy” recommendations and 11 “holds,” with an average target price of $62.50 per share, implying nearly 9% upside.

Natural gas

The Royce fund managers also spotlighted natural gas stocks.

“But this is not a commodity price play, it’s a secular cycle play: power demand is accelerating in the U.S.,” points out Brendan Hartman, a portfolio manager at the Royce Small-Cap Opportunity Fund.

The main driver is the growing energy needs of data centers, which require increasing inputs of power to support “ongoing evolution in AI.” Against this backdrop, Hartman highlights five natural gas stocks:

— Solaris Energy Infrastructure supplies equipment like turbines and energy solutions, including those for data centers. According to MarketWatch, the stock has three “buy” recommendations, with an average target price of $33 per share, suggesting nearly 18% upside.

— ProPetro Holding provides services, such as hydraulic fracturing, to oil and gas companies. According to MarketWatch, four analysts have a “buy” recommendation, and another four rate the stock a “hold.” Their average target price of $10.50 per share implies upside of almost 18%.

— Comstock Resources is a natural gas producer with operations focused in north Louisiana and east Texas. The majority of analysts rate the stock a “hold,” with only one “buy” recommendation and three “sells.” Their average target price is $12.40 per share, below the current market price.

— Sandridge Energy is focused on acquiring and developing oil and gas properties. According to MarketWatch, the stock has only a single “buy” rating, with a target price of $21 per share, almost double its current market price.

— Vermilion Energy, a Canada-based company listed in Toronto and New York, focuses on electricity production and the acquisition, exploration, and development of producing properties. According to MarketWatch, the stock has seven “buy” recommendations and five “hold” ratings, with an average target price of $12.44 per share, implying upside of more than 40%.