In Royce Smaller-Companies Growth Fund, we look for companies that look poised for multi-year periods of robust growth driven by sustainable competitive advantages and/or benefiting from secular growth themes that create favorable conditions for the business. Each of the three companies we talk about in this piece are large holdings in the portfolio that have earned our long-term confidence.

Flotek Industries (NYSE: FTK) is an oil services company that’s historically known for its high-end drilling completion chemicals. These are typically brine/salt-based fluids that are used to prepare a well bore for production and improve well performance. Flotek has a roughly 20% market share in this segment, which represents the majority of revenues but only about half of profits. Its chemicals business is highly correlated with rig utilization and pressure-pumping activity, particularly natural gas formations, which has been in a cyclical down market for several years. In fact, the company narrowly avoided bankruptcy before receiving rescue financing from one of its customers and a CEO with a track record of successful turnarounds. Fortunately, there are signs that this segment could be in the early stages of a recovery, being boosted by higher commodity prices.

We think the more exciting opportunity, however, lies in Flotek’s Data Analytics segment, which is growing rapidly and has substantially higher profit margins. The company has developed a number of innovative solutions, including oil and gas flow measurement and custody, power generation, fuel management, and flare gas monitoring, which have been recognized by the industry and large energy producers as superior solutions to the industry’s antiquated and manual labor-intensive practices currently in use. There are also applications in the behind-the-meter power plant construction industry, which is seeing dramatic increases in demand due to data center growth. We believe that the company is still somewhat undiscovered. We also think that Flotek recently reached what looks like an inflection point in terms of growth and profitability, with the Data Analytics segment likely to command a higher valuation multiple.

Axsome Therapeutics (Nasdaq: AXSM) is a drug discovery company that we have followed for many years, starting when it was a micro-cap stock with no approved products. Fast forward to today, Axsome has three FDA approved and marketed products that are treating psychiatric and neurological disorders, including Major Depression Disorder (MDD) , which is a very large market. The stock has performed well as the company has successfully transitioned from the development stage to a revenue generating pharmaceutical company—and just last month the FDA approved one of its existing drugs, Auvelity, for use in what we believe could be a “blockbuster” treatment for Alzheimer's Disease Agitation, potentially as a first line treatment, given its favorable label. A “blockbuster” drug is typically defined as one with the potential to generate $1 billion or more in annual revenues. This use of Auvelity could arguably generate several billion dollars, which we do not believe is factored into Axsome’s current valuation. A launch for the product as an Alzheimer’s medication is expected this summer, and time will tell how the medical community will embrace this safe and effective new treatment.

ACV Auctions (NYSE: ACVA) is an online auction site for wholesale used cars, assisting dealerships with the disposal of trade-in vehicles that they do not want to keep on their lots and thus taking market share away from traditional physical auction houses. 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. After a very strong 3Q24, a number of factors caused the ACV’s growth rate to decelerate from +30% to closer to +12% in the first quarter of this year. An extended decline in post COVID used car trade-in volumes (which caused an auction industry recession), lower conversion rates due to rising used car prices, stiffer competition from online car companies for trade-ins, and some self-inflicted challenges have all weighed on revenue growth. ACV has continued to grow much faster than industry volumes, however, suggesting that its superior tech-driven model has allowed it to continue to take market share. While the industry itself is still in decline (with an estimated -5% decline in volumes in 1Q26), ACV’s management has stepped up their hiring investment to drive more dealership customer growth. It also appears that a handful of new technology introductions, particularly Viper—an AI powered technology that gives dealers a powerful new way to source inventory directly from their service lane—and new customers in the expanding commercial wholesale markets (rental car companies, leased vehicles, repossessed vehicles, and other fleet business) are starting to gain traction this year, which should drive reaccelerating growth back towards the high teens to 20% levels.

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