Robotti On Navigating Deep Waters: From Theory to PracticeVW Staff
The following is from a presentation which Robotti gave at the Ben Graham Centre for Value Investing 2014 Conference. See more notes from the conference here.
- Manage over $700 million in separate accounts and partnerships on behalf of institutional and individual clients
- Focus on small-to-mid capitalization equities of misunderstood, neglected, or out-of-favor companies
- Established in 1983 by Robert Robotti, our primary focus was on North American investments until 2004
- Expanded in 2005, when Isaac Schwartz launched Robotti & Company’s international investing initiative to apply Robotti & Company Advisors’ investment philosophy to the global equity markets
Two Edges Too Many
Our behavioral edge comes from our ability to tolerate losing money before we make it. As a result, our investment process concentrates on understanding the long-term normalized earning power of a business well before the herd, in this case the market, gains interest.
Value Investing: A Big Tent
“In theory there is no difference between theory and practice. In practice there is.” – Yogi Berra
What Is A Good Business
A high quality or good business is one that can earn above average returns on capital over a sustained period of time.
In a competitive economy, firms that earn above-average returns will quickly attract competition.
Competitors emerge and attempt to compete even more efficiently and/or effectively. This places downward pressure on returns.
As new competitors continue to enter, demand becomes spread among more participants. Average costs will rise as fixed costs are spread over fewer units sold.
Prices fall until returns on capital are driven to a level at or below the cost of capital and economic profits disappear (setting the stage for industry restructuring).
Porter’s Five Forces: Four Too Many?
Companies with Barriers to Entry?
According to Bruce Greenwald: “Without the protection of barriers to entry, the only option a company has is to run itself as efficiently and effectively as possible.”
For companies with barriers to entry, it is most important to execute a strategy that will sustain those barriers.
Cse study for Subsea 7
Subsea 7 SA (ADR) (OTCMKTS:SUBCY) (STO:SUBCO) is a global leader in subsea engineering & construction – a niche industry with a sustainable competitive advantage.
It is the only pure-play among the 3 dominant competitors in an industry with the dynamics to create a runway for significant growth.
Subsea 7 maintains a solid balance sheet and leadership interests are aligned with shareholders.
The company has a record backlog indicating the potential for strong growth, yet still trades at a modest multiple of earnings.
- Seabed-to-surface engineering, construction and services contractor to the global offshore energy industry
- Capable of executing projects of all sizes and complexity in all water depths
Investment Thesis / Variant Perception
Global leader in oligopolistic industry dominated by 3 competitors
Near-term industry-wide concerns and company-specific issues have caused the market to view the business solely through disappointing past earnings and depressed margins
Normalized growth / margins for the industry and the company are being ignored
Long-term, there are dynamics in place to allow for a long runway of revenue growth in an industry protected by sustainable barriers to entry
Backlog growth is just the tip of the iceberg, indicating the potential for significant revenue growth and increased returns on capital
Low margin contracts signed during the 2009-2011 period are being replaced with higher margin contracts
High insider ownership aligns the interest of management and shareholders – capital investment and reinvestment opportunities are focused on returns
We believe that shares trade at > 50% discount to the company’s intrinsic value
See full presentation on Robotti On Navigating Deep Waters: From Theory to Practice in PDF format here.