Robotti & CompanyQuarterly31 Dec 2017Source: advisors.robotti.com
Robotti & Company Advisors YE 2017 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.
Bob Robotti · 1983 · 美国纽约Deep value / cyclical
In plain words
This 2017 investment letter says three things. First, ignore market predictions: the Fed raised rates three times, but stocks still rose, so following forecasts could hurt your returns. Second, in a bull market, don't ignore valuation (whether a stock is cheap or expensive) or you're just gambling. Third, with everyone chasing fads like Bitcoin, good companies are undervalued. For example, homebuilding (like manufactured homes) is 20% below its 50-year average output, but population is growing, so it could rebound. In energy, shale drillers claim they're profitable but actually lose money, while offshore oil has cut costs and looks cheap. Worth reading for concrete examples of finding bargains.
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Robotti Research Report reviews the outperformance of global stock markets in 2017, despite early-year predictions that Fed rate hikes would pose risks. The three rate increases did not trigger a market crash. The core argument is that market forecasters are no more insightful than ordinary investor
~4 min full read · 5 sections
Deep Analysis
Theme and Background
This chapter opens Robotti’s year-end letter to clients in 2017, reviewing a market environment where global equities outperformed expectations despite three Federal Reserve rate hikes that year. The author uses this to question the value of market forecasters and reaffirm a fundamental stock-picking investment philosophy.
Core Views
Market forecasters are no better than average investors: Early-year consensus predicted “moderate returns, rate hikes as a disaster,” yet the market did not collapse after three rate increases. Relying on forecasters may harm net worth.
Valuation is critical in a bull market: The author argues that “don’t think about valuation” is a dangerous slogan in a bull market, as valuation is the touchstone distinguishing investment from speculation.
Value investors face enormous opportunities: The prevalence of momentum trading and speculation (e.g., Bitcoin mania) has widened the gap between price and value, creating a favorable environment for value stock selection.
Key Arguments and Data
2017 Market Performance: Global equities performed well. The author’s benchmark, the Russell 2500 Value Index, returned 10%, and Robotti significantly outperformed that index.
Changes in Trading Structure: 60% of U.S. stock trading volume comes from robots (algorithmic trading), with momentum trading dominating the market.
Homebuilding Industry:
Single-family housing production is more than 20% below the 50-year average, while the number of households is twice that of 50 years ago, presenting a significant opportunity for mean reversion.
After overbuilding in 2008, the industry underwent a “catharsis”: competitors merged or went bankrupt, cost structures improved, and normalized profitability for survivors grew.
Energy Industry:
Oil prices rose nearly 20% in 2017, but the energy sector lagged (the Philadelphia Oil Services Index fell 18.6%).
The author believes claims by U.S. onshore shale producers of profitability at $50/barrel are unreliable (a massive funding gap confirms this), leading to market misconceptions about the industry’s economics.
Onshore producers struggle with profitability, and future reserve replacement will primarily come from offshore, where economics have significantly improved due to technological advances and cost cuts.
Companies/Assets Involved
Company/Asset
Role
Key Data
Bullish/Bearish
Cavco Industries (Nasdaq:CVCO)
One of the core holdings in the homebuilding sector, one of the best-performing investments in 2017
Manufactures manufactured homes; integrated two major competitors, Palm Harbor and Fleetwood, during the industry’s decade-long downturn
Bullish
Builders FirstSource
Another major contributor in the homebuilding sector
Ranked among the top five contributors to performance in 2017
Bullish
Subsea 7
Major contributor in the energy sector
Rose 19.5% in 2017
Bullish
Skyline / Champion
Major M&A event in the manufactured home industry
Agreed to merge in early 2017; after the merger, three companies (Clayton Homes, Cavco, and the new Champion) will control 80% of the market
Bullish (industry consolidation positive)
Clayton Homes (Berkshire subsidiary)
Largest player in the manufactured home market
Together with Cavco and the new Champion, controls 80% of the market
Neutral (industry context)
Investment Insights
Homebuilding Industry: Single-family housing production is well below historical averages, and with demographic trends and industry consolidation, there is an opportunity for mean reversion. Investors should focus on the manufactured home sub-sector, as regulatory easing and credit expansion may provide significant tailwinds. Cavco, as a well-managed, financially sound survivor, is a core target.
Energy Industry: Market misconceptions about onshore shale profitability have led to an undervaluation of the sector, while offshore oil economics have improved. Investors should focus on overlooked energy securities with improving fundamentals but low valuations, especially offshore-related assets. The author believes the oil price recovery is sustainable, though short-term volatility is inevitable.