Robotti & Company Advisors Q3 2017 Letter

Theme and Background

This chapter is Robotti & Company's letter to clients for the first nine months of 2017, primarily reviewing portfolio performance and focusing on two core holdings—RadNet and Norbord. The author emphasizes at the outset that short-term market fluctuations (such as daily ups and downs) are a "nauseating experience," but the firm insists on holding high-quality businesses for the long term rather than chasing short-term market sentiment.

Core Views

Long-term holding of undervalued high-quality businesses is the core path to wealth creation, rather than focusing on "the latest market dynamics" or media-hyped fear and greed.
The gap between price and value itself serves as a catalyst, eliminating the need to wait for specific events to trigger value realization. The author cites Benjamin Graham's view: low-profit industries will return to normal profit margins as competition exits.
Contrarian investing in cyclical industries is key to achieving excess returns, but it requires investors to endure short-term paper losses.

Key Arguments and Data

1. Performance Comparison: In the first nine months of 2017, the Robotti portfolio outperformed the Russell 2500 Value (5.86%) and the S&P 500 (14.24%).

2. RadNet Case:

Business Model: Consolidates independent medical imaging facilities in limited geographic markets, reducing costs through economies of scale.
Challenges: Medicare reimbursement cuts, acquisition integration, and site optimization have led to a slow realization of economic returns.
Opportunity: Investor apathy and impatience caused the stock to weaken early in the year, and the author took the opportunity to increase the position.
Current Status: The market has begun to reassess, but fundamental improvements have not yet been fully reflected.

3. Norbord Case:

Industry Landscape: In North American OSB (oriented strand board) capacity, the top five companies control approximately 84% of capacity, with Norbord holding 27% (the largest share).
Historical Performance: The 15-year return on capital (ROC) reached 22%, far exceeding competitors.
Recent Catalyst: Reconstruction demand triggered by Hurricanes Harvey, Irma, and Maria will accelerate demand growth.
Supply-Demand Dynamics: Idle capacity is limited, and pricing and cash flow continue to improve.

Companies/Assets Involved

Company	Role	Key Data	View
RadNet (NASDAQ:RDNT)	Medical imaging facility operator	Consolidates independent non-hospital providers, reduces costs through economies of scale	Bullish: Low valuation, improving fundamentals, market repricing
Norbord (NYSE:OSB)	World's largest OSB producer	27% of North American capacity, 15-year ROC of 22%	Bullish: Industry consolidation, tight supply-demand, hurricane reconstruction demand
Builders FirstSource (NASDAQ:BLDR)	Building materials distributor	Performed well, providing insights for Norbord investment	Bullish (implied)

Investment Insights

Contrarian investing in cyclical industries: Buy leading companies with cost advantages and management discipline (e.g., Norbord) during industry troughs, and wait for excess cash flow driven by supply-demand improvements.
Ignore short-term catalysts: Do not wait for "event-driven" value realization; the gap between price and value itself is the reason for long-term holding.
Focus on fundamentals: Avoid being swayed by media and market sentiment, and concentrate on the long-term economic value of businesses (e.g., the gradual realization of RadNet's economies of scale).