Bob Robotti, is the founder of Robotti & Company Advisors. Bob Robotti is a value oriented hedge fund, which invests in small cap stocks. Bob Robotti spoke at the last Value Investing Congress in Omaha. He suggested EFX, which is up approximately 40%, since the recommendation.
The topic of Bob’s presentation today is ‘Building an Investment Thesis’
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Below are our notes on the presentation:
When looking at investments Robotti looks for 3 edges: Analytical, Informational, and Behavioral. Overall behavioral is the toughest to teach, but the most important. Most investment news is based on short term events, and Robotti tries to ignore the noise. From an analytical standpoint, Porter says to focus on 5 forces but Robotti tends to only focus on one: barriers to entry.
As a contrarian investors they do catch the falling knife, and over time the fund has some blood on their hands. But while many investors say they look for out of favor, Robotti truly looks for ugly ducklings that will turn into swans.
Post Einhorn, the media section is back to mostly empty
Robotti thinks the key to the behavioral edge is patience and discipline. A catalyst may take time, and with the unpredictability investors sticking with the thesis is essential.
Robotti likes the homebuilding industry after the recent consolidation. He also likes the shipping business which showcases oligopolistic characteristics and lost a few competitors over the years.
Robotti’s pitch today is: Calfrac Well Services: CFW.TO
The company provides hydraulic fracking services in locations around the world. CFW is a leader in Canada, #6 in the world, and has a long runway for growth. The business has high returns on capital, high insider ownership, and a 4% dividend. Based on Robotti’s work, he thinks the stock has the ability to double.
The bear case revolves around low natural gas prices and weak earnings which continue to be downgraded. Margins are compressing, and Robotti views his position here as catching a falling knife. Their variant view centers around a resurgence in North American industry and thus more hydraulic fracking. Horizontal drilling technology combined with hydraulic fracking is driving growth in this sector over the long term.
Robotti views increased production from shale gas as a long-term thesis, and he likes owning the service providers. Mexico and Argentina provide huge opportunities going forward, and Calfrac is already operating in those markets.
For the first time in 62 years the U.S. is now a net oil exporter. Robotti views this fact as more of a long-term trend rather than a one time phenomenon. The price differential between oil and natural gas is close to an all-time high. Compared to the relative power generating ability of these two energy sources, Robotti views this as an arbitrage opportunity that will close over time. He thinks smart people will recognize this disparity and the gap will close eventually.
Robotti thinks Calfrac trades at a discount in part because its a Canadian listed stock. Within Canada the company has a great market position and first mover advantage. Canadian independents tend to expand internationally quicker that the U.S. counterparts. The overall market in the U.S. is 8x the size of the Canadian market, so Canadian companies are forced to go abroad for expansion.
Directors and management own 26% of the company, and Robotti likes the 4.2% dividend yield. The insiders have a history of reinvesting the capital intelligently. Calfrac is a cyclical business that requires regular capital expenditures. With no short-term debt maturities, $160mm on the balance sheet, and $250mm in capacity on the revolver Calfrac has capital to expand the business.