Royce shares four high-conviction long-term holdings

In an interview, Francis Gannon, co-CIO at Royce, founded by Wall Street legend Chuck Royce, has spotlighted four small-cap stocks that two Royce funds have «high long-term confidence» in.

Arcosa

With a market capitalization of $4.6 billion, Arcosa provides infrastructure-related products and solutions, including construction materials, engineering solutions, and transportation products. Gannon notes that the company “posted solid third-quarter results despite the negative impact of inclement weather in several of the key operating regions.” For July-September 2024, Arcosa reported revenue of $640.4 million, up 8% year over year, and adjusted EBITDA margin of 17.8%, up 270 basis points. Gannon points out that the company exercised “the pricing power associated with the local monopoly nature of the aggregates business.” Note that aggregates are used in concrete mixtures to reduce shrinkage, enhance strength, and improve resilience. Gannon adds that “U.S. infrastructure spending tailwinds persist both bode well for future growth.” In 2024, Arcosa completed the acquisition of Stavola, an aggregates producer that primarily serves the New York-New Jersey Metropolitan Statistical Area, which, Gannon notes, gives the company entry into a new geography.

According to MarketWatch, out of the seven analysts who cover Arcosa, six have a “buy” recommendation, while one rates it a “hold.” Their average target price of $116 per share suggests upside of more than 22%.

ESAB Corporation

ESAB, with a $7.1 billion market capitalization, is a global leader in fabrication technology for both welding equipment and consumables.

Gannon points out that ESAB is relatively new to the public markets, its shares having debuted on the New York Stock Exchange in 2022 following the company’s spinoff from the medical technology company Enovis. In his view, ESAB has just embarked on a “transformational journey” with streamlined operational efforts, new strategies, and footprint rationalization. In the third quarter of 2024, ESAB reported a 1% year-over-year decline in the top line to $673 million. However, adjusted EBITDA rose 6% to $125 million, while the EBITDA margin expanded 130 basis points to 19.6%.

“The market appears to be recognizing ESAB’s significant transformation, as well as its product mix, product innovation, and the geographic expansion opportunities that lie ahead,” Gannon says.

Most analysts who cover ESAB, according to MarketWatch, share his optimism. The name has six “buys,” three “holds,” and two “sells,” with an average target price of $136.60 per share implying 16% upside versus the last closing price.

Haemonetics Corporation

Haemonetics, with a market capitalization of $3.9 billion, is a dominant provider of plasma collection systems, consumables, and software. The company says it makes the plasma industry’s only integrated end-to-end collection solution. In the fiscal-2025 second quarter (ended September 28, 2024), Haemonetics reported 9% year-over-year revenue growth to $346 million and an operating margin increase of almost 4 percentage points to 15%. Gannon explains that the company achieved its goal of improving operating margins by restructuring its business and increasing its hospital-based segment’s contribution to earnings. The company’s product lineup further includes vascular closure devices, one of which — used for catheter ablation, a minimally invasive treatment for heart rhythm disorders — was recently launched.

According to MarketWatch, Haemonetics stock has nine “buys” and two “holds” among coverage analysts. Their average target price of $110.80 per share suggests 42% upside versus the last closing price.

JBT Marel Corp.

JBT Marel, with a $6.27 billion market capitalization, manufactures food processing machinery, such as stainless steel tanks and automated guided vehicles. Gannon highlights the company’s “terrific third-quarter 2024 results, which drove its shares higher in late October.” It posted 12% year-over-year revenue growth to $454 million and an adjusted EBITDA margin expansion of 160 basis points to 18%. On October 23, the day after these numbers were announced, JBT Marel stock surged nearly 18% to $112.15 per share.

Orders for the company’s products have grown across all geographies, which partly reflects long-term drivers such as automation to improve efficiency and reduce labor costs, Gannon believes. In addition, in the first week of 2025, JBTM completed its acquisition of Marel, an Iceland-based food and beverage equipment company focused on primary processing. Still, only half of the six analysts covering the stock have “buy” calls, according to MarketWatch. Two have “hold” recommendations, while one even rates it a “sell.” Their average target price is $129 per share, implying upside of just under 6% versus the last closing price.