Royce names three small-cap favorites 'poised for multiyear periods of robust growth'

Royce Investment Partners has highlighted three growth names that have earned the long-term confidence of one of its small-cap funds. These favorite holdings include an oilfield services company, a biotech, and an online wholesale used-car marketplace.

Partner and portfolio manager of the Royce Smaller-Companies Growth Fund, Chip Skinner, discussed three positions in the portfolio that the fund believes in for years to come. According to Skinner, these names have strong competitive positions, while trends are in place that should keep supporting their businesses for years to come.

The fund invests in smaller companies generally with market capitalizations of $7.5 billion or less, focusing on businesses with rapid revenue or earnings growth when the fund believes the market still undervalues them.

Flotek (FTK)

The oilfield services company has historically been known for its high-tech solutions used to prepare wells for production and improve well performance. However, according to Skinner, this part of Flotek’s business suffered, particularly because of the cyclical downturn in the natural gas sector. The company narrowly avoided bankruptcy after receiving financing from one of its customers. The arrival of a new CEO with experience executing turnaround strategies also helped. Royce now sees signs that Flotek’s chemicals segment is entering a recovery phase, supported by rising commodity prices.

But the fund sees a more attractive opportunity in the company’s Data Analytics segment. “This segment is growing rapidly and has substantially higher profit margins,” Skinner noted. One of the promising applications for the company’s analytics solutions is in behind-the-meter power plant construction. That has become especially relevant because of surging demand from data centers. “We believe that the company is still somewhat undiscovered,” the Royce manager said.

Wall Street analysts share his optimism. The stock has six ratings, all “buy.” The average target price is $21.93 per share, implying upside of about 7% versus the closing price on Thursday.

Axsome Therapeutics (AXSM)

The company develops drugs and already has three FDA-approved products on the market. “They are treating psychiatric and neurological disorders, including Major Depression Disorder (MDD), which is a very large market,” Skinner said, describing Axsome’s growth story. The company attracted the fund’s attention years ago, and the bet paid off: Axsome stock posted strong gains as the company successfully transitioned from the development stage to commercialization, the Royce manager said.

Just recently, the FDA approved another Axsome drug, Auvelity, for use in treating agitation associated with Alzheimer’s disease. Royce believes the drug has the potential to become a blockbuster, meaning annual revenue could exceed $1 billion. “This use of Auvelity could arguably generate several billion dollars, which we do not believe is factored into Axsome’s current valuation,” Skinner emphasized.

According to MarketWatch data, the stock has 19 “buy” calls versus two “hold” ratings. The average target price is $270.89 per share, implying upside of about 16.5%.

ACV Auctions (ACVA)

The online wholesale used-car auction platform helps dealerships dispose of vehicles they do not want to keep on their lots, the Royce partner explained. However, the fund has not been fully satisfied with the investment’s performance.

“We have held the stock for several years, and it would be an understatement to say that it has so far not performed as well as we had hoped,” Skinner said. He noted that after a very strong third quarter of 2024, when revenue rose 44% year over year, ACV’s growth slowed. In the first quarter of this year, the company’s revenue increased 12% year over year to $204 million.

Still, according to Skinner, ACV continues to grow faster than the overall market. Several positive trends are supporting the company’s outlook: the management increased investment in hiring to accelerate growth in its dealer customer base; new technology solutions – especially an AI-powered system that helps dealers source vehicles directly from service-lane customers – are beginning to gain traction; and additional growth is expected from expansion into new segments, including rental cars, leased vehicles, repossessed vehicles, and commercial fleet operations. These trends should "drive reaccelerating growth back towards the high teens to 20% levels,” the Royce manager said.

Year to date, ACV stock has fallen nearly 30%. Analyst sentiment on ACV remains mostly positive: the stock has eight “buy” calls, four “hold” ratings, and just one “sell” recommendation. The average target price of $9.30 per share implies upside of 67.5%.