Royce Growth Fund manager names two 'high-confidence' small-cap holdings

One of the holdings, Cantaloupe, benefits from a growing number of self-service points. / Photo: Cantaloupe.com

Chip Skinner, who manages the Royce Smaller-Companies Growth Fund, has spotlighted ACV Auctions and Cantaloupe as two «high-confidence» holdings. The fund is part of Royce Investment Partners, founded by Wall Street legend Chuck Royce, and invests in companies that, in the words of Skinner, «look poised for multi-year periods of robust growth driven by sustainable competitive advantages and/or that appear to be benefiting from secular growth themes that create favorable conditions for the business.»

ACV Auctions

ACV Auctions, with a market capitalization of just under $3.6 billion, brands itself the leading U.S. auction platform for selling used cars, primarily to dealers.

Currently, about 85% of wholesale auctions take place offline, notes Skinner. This means that vehicles must be transported to a physical site, where buyers and sellers come to inspect them and participate in the auctions.

ACV Auctions is different: It holds auctions online, commanding a two -thirds share of this segment, and is taking market share from physical auctions, says Skinner. The company’s technology collects used car data and its inspectors conduct the inspections. ACV Auctions earns about $500 per sold vehicle, Skinner calculates.

The company currently serves about one in three of the 17,000 U.S. dealerships and has room to grow. Skinner notes that ACV Auctions is expanding its customer base by increasing the number of services for existing customers and entering new auction segments, such as commercial vehicles and bank repossessions. While the company has invested «heavily» in these initiatives, it has recently broken even, Skinner notes.

ACV Auctions last reported earnings for the third quarter of 2024. Its revenue grew 44% year over year to $171 million, while non-GAAP net income came in at $8 million, versus a loss of $3 million in the same period in 2023.

According to MarketWatch, the stock has 11 «buy» and four «hold» ratings. The average target price is $24.46 per share, implying 11% upside versus the last closing price.

Cantaloupe

Cantaloupe, with a market capitalization of $619.6 million, started as a provider of vending machine hardware that enabled those machines to accept credit card payments. It now offers comprehensive solutions, including micropayment processing (transactions ranging from a few cents to $20), self-checkout kiosks, mobile ordering, and more.

Cantaloupe’s clients include restaurants, amusement parks, and outdoor festivals. The company also produces card readers for laundromats and cashless vehicle services, such as parking and self-serve car washes.

Cantaloupe processes more than a billion transactions annually for over 30,000 client endpoints worldwide and, according to Skinner, has room to grow thanks to the increasing number of self-service points. Another appealing feature of its business, he adds, is that it sells access to its hardware on a subscription basis, generating recurring revenue.

Cantaloupe continues to expand by targeting new micro markets — small self-service retail spaces, usually found in office buildings or other workplaces, where people can buy food and drinks without a cashier.

According to MarketWatch, all six analysts covering Cantaloupe have «buy» calls. Their average target price is $11.50 per share, implying 35% upside versus the last closing price.