Robotti & Company Advisors Q1 2013 Letter
Robotti & Company is a New York deep-value boutique founded by Bob Robotti in 1983, specializing in left-for-dead cyclical industries — energy services, building products, shipping — with multi-year holding periods and occasional activist letters. It manages about $650m; Bob is regarded as one of the most steadfast Graham-tradition cyclical value hunters.
In plain words
This letter from Robotti & Company covers their first quarter of 2013. Their portfolio returned only 4.48%, far below the market's 13.35%. But they aren't worried. They believe short-term underperformance is a chance to buy good companies at a discount. Their biggest holdings, Subsea 7 and Stolt Nielsen, lagged but have strong long-term potential. For example, Stolt's terminal and container businesses are growing, but the weak oil tanker business hides that. They also bought a new stock, CVU, at a price-to-earnings ratio of just 6 (a low P/E means the stock is cheap relative to its earnings), because investors are too pessimistic about aviation. The key lesson: don't panic-sell when your investments dip—focus on the company's real value.
The Robotti report reviews the performance of the value equity portfolio in the first quarter of 2013: a net return of 4.48%, underperforming the benchmark index by 13.35%. The core thesis is to adhere to a "buy and hold" strategy, arguing that short-term volatility creates opportunities for long-te
Theme and Background
This chapter is the opening section of Robotti's Q1 2013 letter to clients. It reviews the performance of the value equity portfolio for the quarter and articulates the core logic of the management team's commitment to long-term value investing, despite short-term underperformance relative to the benchmark. The report focuses on the short-term drag and long-term potential of two major holdings in the energy and industrial sectors: Subsea 7 and Stolt Nielsen.
Core Thesis
The author's core investment argument is: "Buy and hold" is not obsolete; rather, it creates opportunities for patient and diligent value investors. Short-term price fluctuations are the inevitable cost of waiting for the market to recognize a company's true intrinsic value and should not lead to abandoning the strategy due to quarterly underperformance.
Contrarian / Consensus-defying judgments:
- Although the portfolio's net quarterly return was only 4.48%, far below the benchmark's 13.35%, the author argues this precisely represents an opportunity created by market mispricing, not a deterioration in fundamentals.
- The report contends that Stolt Nielsen's earnings growth in its terminal and container businesses was masked by weakness in its tanker segment, with the market overlooking its structural improvements.
- For Subsea 7, the author characterizes its poor performance as "delayed value realization," not value destruction.
Key Arguments and Data
- Performance Comparison: Portfolio quarterly return of 4.48% vs. benchmark return of 13.35%, underperforming by 8.87 percentage points.
- Long-Term Performance: Since inception (20 years), the portfolio's annualized return is 13.04%, significantly outperforming the benchmark's 8.59%, demonstrating the long-term strategy's effectiveness.
- Drag from Major Holdings: Due to their high portfolio weights, the underperformance of Subsea 7 and Stolt Nielsen relative to their industries and indices was the primary cause of the portfolio's overall underperformance.
- Stolt Business Structure: The report notes that its terminal and container businesses achieved "steady, profitable growth" by year-end, but persistent weakness in the tanker business masked this positive signal.
- Industry Supply Logic: Financial distress in the tanker business has led to a lack of reinvestment in the industry, setting the stage for a future recovery.
- New Position CVU: Trading at a P/E ratio of just 6.0x (based on trailing twelve-month earnings), the stock is pressured by the "sequester," issues with the 787 Dreamliner, and general unease in the aerospace sector.
The value equity composite returned 4.48% in Q1 2013, trailing the benchmark's 13.35%, but has generated a 20-year annualized return of 13.04% since inception, outperforming the benchmark's 8.59%.
Companies/Assets Covered
| Company/Asset | Role | Key Data | Bullish/Bearish |
|---|---|---|---|
| Subsea 7 (OB:SUBC) | Largest portfolio holding | Quarterly performance lagged industry and major indices | Bullish (delayed value realization, strong fundamentals) |
| Stolt Nielsen (OB:SNI) | Second-largest portfolio holding | Earnings growth in terminal and container businesses, weakness in tanker business | Bullish (market mispricing, industry supply contraction paving way for recovery) |
| CPI Aerostructures (NYSEAMEX:CVU) | New position | P/E 6.0x; provides structural components for Boeing, Lockheed Martin | Bullish (benefiting from commercial aerospace backlog and specific government aircraft programs) |
| School Specialty (PINK:SCHSQ) | Liquidated | Business deteriorated due to sharp decline in K-12 education spending, eventually triggering debt covenant default | Bearish (sold, capital reallocated) |
| Leucadia (NYSE:LUK) | Significant portfolio holding | Weight of 3.6% pre-merger; still trading below book value post-merger with Jefferies | Bullish (merger provides capital access, tax advantages, and management transition) |
| Jefferies (NYSE:JEF) | Significant portfolio holding | Weight of 2.0% pre-merger; CEO Richard Handler has an excellent track record | Bullish (gains greater capital support post-merger, potential for future premium sale) |
Investment Insights
- Adhere to Contrarian Positioning: When a portfolio underperforms in the short term due to heavy exposure to energy and industrial sectors, one should not panic and reduce positions, but instead examine whether fundamentals have deteriorated. The report argues that the market's pricing of Subsea 7 and Stolt is erroneous, which is precisely a signal to add to or hold positions.
- Focus on Companies with Masked Structural Improvements: The Stolt case shows that when a company has both a cyclically weak business and a structurally growing one, the market often focuses on the former and undervalues the latter. Investors should actively dissect the business to find earnings growth points hidden by "noise."
- Leverage Industry Supply Contraction for Recovery Plays: Financial distress in the tanker industry has led to a lack of reinvestment, creating conditions for a future rebound in shipping rates. Investors can look for similar niche sectors where industry losses have led to supply rationalization, setting the stage for a cyclical turnaround.
- Evaluate New Positions Based on Valuation and Catalysts: CVU was purchased at a 6x P/E ratio, reflecting excessive market pessimism over the "sequester" and the aerospace sector. Investors should seek similar opportunities where short-term negative sentiment has compressed valuations, but long-term order books and business structures remain solid.