Better Know a Stock Picker

Welcome, Fools, to part 47 of our several-thousand-part series, "Better Know a Stock Picker," which is loosely, but not too loosely, based on Stephen Colbert's "Better Know a District" from The Colbert Report.

Like Stephen and his thorough investigations into America's congressional districts, each week I take a look at a fund you may want to own. What's on tap this week?

Royce Special Equity (RYSEX)

Expense ratio

1.13%

Fund size

$608 mil.

1-year return

20.30%

5-year return

11.63%

10-year return

N/A

Sources: Royce Funds

Top 5 holdings

Company

% of Assets

National Presto Industries (NYSE:NPK)

4.6%

Rofin-Sinar Technologies (NASDAQ:RSTI)

3.8%

Bio-Rad Laboratories Cl A (AMEX:BIO)

3.8%

Carpenter Technology (NYSE:CRS)

3.3%

CSS Industries (NYSE:CSS)

3.1%

Sources: Royce Funds

Meet Charlie Dreifus
The fightin' team at Royce Special Equity is led by Charlie Dreifus, who Shannon Zimmerman interviewed for the inaugural edition of Motley Fool Champion Funds in the April 2004 issue.

It was an easy choice for Shannon. Dreifus is one of those superstantial stock pickers who'll teach you something if you let him. Here's one of my favorite nuggets from that interview:

When a family's net worth resides in a business, they are less prone to give it away in terms of stock options or other things that negate their own financial interest.

Smart thinking. If only the Street's investapo cared. They run on the short-term performance hamster wheel and, through May 31, Royce Special Equity has lost to the Russell 2000 over the last three- and five-year periods.

Don't worry; Dreifus won't remain a laggard for long. He's too good at what he does. Plus, he's been in the business for 37 years and, to this day, remains a firm follower of the principles espoused by value pioneer Benjamin Graham in The Intelligent Investor.

He's also been at the helm of Special Equity since it opened for business in May of 1998. The fund has returned 11.45% annually to its investors since. Eat that, Wall Street.

How he invests
What's his secret? Dreifus has three, actually.

First, he likes to invest in family-run businesses. (See above.) Second, he's determined to never lose money by picking only stocks that feature a massive margin of safety. Third and most important, he'll refuse anything other than a ridiculous bargain. From Dreifus' 2004 interview with Shannon:

What I'm looking for is absolute value, as a buyer of the entire business would. I'm looking for such a price that if I bought the whole company and borrowed the money, I would have a positive carry.

Consider Deb Shops (Nasdaq: DEBS  ) , which Dreifus has been buying shares of recently. This specialty apparel retailer sells each $1.17 in revenue for $1 and trades for less than 15 times its expected earnings. Pretty cheap, wouldn't you say?

I would. Mix in a 1.80% dividend yield and extraordinary commitment from insiders, who still own more than 70% of Debs' outstanding shares, and this stock could deliver years of market-beating gains.

Is this fund for you?
Should you be buying Royce Special Equity? Shannon thinks so. He added the fund to the Champion Funds portfolio in the September 2006 issue and it's been a market-beater since. With Dreifus at the helm, I see no reason why it won't continue to be.

Want more ideas? Get 30 days of free access to Champion Funds right now. Shannon's picks are up 13% on their respective benchmarks as I write and there's never an obligation to subscribe.

Till next week, fund nation. Good night.

For more Foolish coverage of small cap superstars:

Rofin-Sinar is a Hidden Gems pick.

Fool contributor Tim Beyers, who is ranked 6,373 out of more than 30,200 rated investors in our Motley Fool CAPS investor-intelligence database, is a regular viewer of The Colbert Report. (Stay the course.) Tim didn't own shares in any of the companies mentioned in this article at the time of publication. Tim's portfolio holdings can be found at his Fool profile. His thoughts on mutual funds, Foolishness, and investing in general may be found in his blog. The Motley Fool's disclosure policy is always championship caliber.


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