Veteran manager picks stock market’s losers over the shiny winners

“We call ourselves value investors because we’re looking to buy businesses for far less than what the business is worth,” with “excellent growth opportunity,” Robotti told MarketWatch in a recent interview. They hang on where lots of investors get impatient and bail out early if they don’t see share prices immediately rise.

“If you’ve identified the right business and done the right research and understand the company, you understand that the earnings power is substantially more, but you know that’s really not manifesting right now,” he said.

Robotti, who manages around $900 million in separately managed account and private partnerships, has tended to focus on small-cap and medium-size companies, which have been a tough asset class.

One stock pick from the veteran manager is Builders FirstSource
BLDR,
-5.81%,
where his exposure dates back to 2009, when the housing market was belly up and the company’s market capitalization stood at $200 million. That number has since soared to $20 billion, as the company has changed and transformed, merging with rival BMC Solutions in early 2021

Builders has drawn Wall Street praise for its home-building ecosystem. The company came through a gloomy 2022, helped by its changed business model, said Robotti. Shares surged 157% in 2023, though are up just 0.4% so far this year.

The manager says he doesn’t mind if an economic cycle stays bad, as the right company with the right differentiated product can hold on while competitors melt away.

Energy services is another industry that has been a focal point for Robotti, who first invested in that space in 1976. Fossil fuels, the subject of major underinvestment for years, is a businesses he doesn’t see going away as fast as many would like.

“And what’s really happened is the opportunity to develop offshore oil and gas fields is clear, obvious, dramatic….you can’t really get that onshore,” Robotti said. Since 2014 and the beginning of the correction in the energy business, demand has risen and supply has dropped.

“So we think that things associated with the offshore energy services business, you have excellent supply/demand dynamics…rates are dramatically improving…and as rates, revenues rise, all of that falls to the bottom line,” he said. “And yet these businesses still trade for 40%, 30% of asset value to build new, and at some point, the economics of this business will gravitate to what it would cost to build a new vessel so therefore there is substantial growth in these businesses.”

Tidewater
TDW,
+1.03%,
which provides offshore service vessels for the energy industry has been an investment of his since 2022, and he is currently a board member of the company. Tidewater returned 95% in 2023, and is down 1.1% this year.

Energy companies tie into his theory that for decades, North America will offer competitive advantages for companies over places like Europe, given lower costs of energy. That also ties in with what he says investors need to think about when looking for companies, that is the “metamorphosis of the old economy.”

“Because cyclical businesses go through this constant process when things are over supplied, then it gets weak. And then when it gets weak, capital is constrained, people shut capacity and consolidation happens and all these things happen repeatedly,” he says.

The markets

Stock futures
ES00,
+0.46%

YM00,
+0.26%

NQ00,
+0.76%
are moving higher, as Treasury yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
shift lower. The dollar
DXY
is down and gold
GC00,
+0.42%
and oil prices
CL.1,
-0.36%
are up. The Hang Seng is up 3.5% after China’s central bank said it would cut the reserve ratio for banks by 50 basis points from next month.

The buzz

Tesla
TSLA,
+0.16%
is in the earnings spotlight for later, along with IBM
IBM,
+0.64%.
DuPont shares
DD,
+0.40%
are tumbling on a profit warning, AT&T reported subscriber beats, but stock is down. Kimberly-Clark
KMB,
+2.13%
is also slipping after weak earnings.

Read: Here’s the No. 1 question retail investors want Tesla to answer ahead of earnings

Reporting late Tuesday, Netflix shares
NFLX,
+1.33%
are up 8% on a surge in new subscribers and ad sales, and proving the naysayers wrong. Deutsche Bank downgraded the streaming service, saying the price now reflects its leading position.

Texas Instruments shares
TXN,
-0.28%
are down on a disappointing forecast from the chip-industry bellwether. Dutch chip equipment supplier ASML
ASML,
+1.53%

ASML,
+6.82%
reported a big gain in orders.

EBay
EBAY,
+0.85%
looks to become more “nimble,” with plans to cut 1,000 jobs, or 9% of workers. SAP
SAP,
+0.10%
set out a plan to cut 8,000 workers as it focuses on AI.

United
UAL,
+5.31%
said it’s rethinking longer-term plans for Boeing’s biggest 737 Max jet after dozens of Max 9s were grounded this month.

Preliminary U.S. services and manufacturing purchasing managers indexes from S&P are due for release at 9:45 a.m.

Former President Donald Trump won New Hampshire’s Republican presidential primary, moving him one step closer to knocking out ex-South Carolina Gov. Nikki Haley.

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