Biotech, online auction and data analysis: three promising small-caps from the Royce Foundation

Royce Investment Partners, an investment firm specializing in small-cap stocks, revealed which three companies have earned the long-term confidence of one of its small-cap funds. They include an oilfield services company, a biotech and an online platform for wholesaling used cars.

Chip Skinner, partner and portfolio manager of the Royce Smaller-Companies Growth Fund, talked about three bets in the portfolio that the fund believes in for years to come. He said these companies have everything in place for long-term growth - strong competitive positions and trends that will sustain their businesses for a long time to come.

Royce Smaller-Companies Growth Fund invests in smaller companies - typically those with capitalizations under $7.5 billion - and bets on businesses with rapid revenue or earnings growth if it believes the market is underestimating their potential.

Flotek Industries (ticker: FTK)

The oilfield services company has historically been known for its high-tech solutions to prepare wells for production and improve well efficiency. However, Skinner says this part of Flotek's business has suffered, especially from the cyclical downturn in the natural gas sector. The company narrowly avoided bankruptcy after securing financing from a customer. The arrival of a new CEO with a track record of successful turnaround strategies also helped. Royce now sees signs that Flotek's chemicals segment is moving into a recovery phase, helped by rising commodity prices.

But the fund sees a more interesting opportunity in the Data Analytics segment: "This area is growing faster and has higher margins," Skinner notes. One promising application area for new analytics solutions is in behind-the-meter (behind-the-meter) power plant construction. This is especially relevant because of the sharp increase in demand from data centers.

"We believe the company remains undervalued and relatively 'undiscovered' by the market," said Manager Royce.

Wall Street analysts share Royce's optimism, the company has six ratings and all are Buy. The average target is $21.93, suggesting a potential upside of about 7% to the closing price on May 14.

Axsome Therapeutics (AXSM)

The company is in the drug development business, and it already has three FDA-approved drugs on the market. "They're used to treat psychiatric and neurological conditions, including clinical depression, and that's a very large market," Skinner tells Axsome's success story. The company has attracted the fund's interest for years and the bet has played out: the stock has performed strongly as it has successfully moved from the development stage to the commercialization stage, said Royce, the manager.

More recently, the FDA approved another of Axsome's drugs, Auvelity, for use in treating agitation in Alzheimer's disease. Royce believes it has a good chance of becoming a blockbuster - a drug with potential revenues of more than $1 billion a year.

"Auvelity's potential is not yet built into the company's current valuation," Chip Skinner emphasizes.

On Marketwatch, the company has 19 recommendations to buy the stock and two recommendations to hold. The target price is $270.89, which gives a potential upside of about 16.5% to the last closing price.

ACV Auctions (ACVA)

An online auction platform for the wholesale sale of used cars helps car dealers get rid of cars they don't need, explains partner Royce. However, the fund is not entirely happy with the results of this investment. "We've held this stock for several years now, and frankly, its performance so far has been worse than our expectations," Chip Skinner shared. He noted that after a very strong third quarter of 2024, when revenue added 44%, ACV's growth has slowed - in the first quarter of 2026, the company's revenue grew 12% to $204 million. Still, Skinner said ACV continues to grow faster than the overall market. Its outlook is supported by a number of positive signals:

- ACV management increased investment in hiring employees to accelerate the growth of the dealership's customer base.

- new technology solutions-especially an AI system that helps dealers find cars to restock right among the car dealership's customers-are starting to pay off.

- additional growth is expected due to the development of new niches: car rental, leasing, seized cars, and company fleets.

"If these trends continue, the company's growth could accelerate again to 15-20% per year," believes Manager Royce.

Since the beginning of the year the company's shares have fallen by almost 30%. Analysts' opinion about ACV prospects is mostly positive: the company's securities have eight recommendations to buy, four - to hold and only one - to sell. The average target is $9.3 - 67.5% higher than the last closing.