00:05 Everybody, welcome to SumZero. Today we have Bob Robotti from Robotti and Co. He doesn't need much of an introduction, has sort of been in the industry for decades now. Bob, a legendary value investor. We're super grateful to have him join for this. So just really quickly on Bob, he is the president and chief investment officer of Robotti and Company.
00:33 He holds a BS from Bucknell University and an MBA in accounting from Pace University. Prior to forming Robotti and Company, which he launched in 1983, Bob worked as a vice president and CFO at Gabelli, which is another fund I'm sure most of you have heard of. So with that, we're going to be talking today about finding value in corners of the market that maybe don't get the sort of exposure that Mag 7 gets or a lot of the stuff you might come across in mainstream media would get. Bob
01:07 likes to call this the rise of the fallen, I think. Is that right, Bob? Do I have that phrase? >> Restoration to the fall or restoration. >> Restoration of the fallen. Correct. Yes. I'm thinking about Transformers. You've seen that movie. But Bob, why don't you just as a start give your own quick background, how you sort of got into investing, and then we can get into the meat of your talk.
01:33 >> Sure. Great. You mentioned of course I worked for Gabelli for three years and when I did work for Mario from 80 to 83, right when I started he managed $7 million. When I left it was $77 million. I was before kind of the meteoric rise of Gabelli, who has been around for a long long time and had been extremely successful.
01:53 So he really wasn't that well known then. Before that, for four years I was with an accounting firm that audited Tweedy Browne. So that was my original induction in investing. And so Tweedy Browne of course is probably more closely related to Ben Graham than almost anybody else, and so therefore I was an accountant who happened to be doing an audit of Tweedy.
02:13 Of course, the timing was extremely precipitous because what you had was the 73-74 market correction where the Nifty Fifty suddenly weren't the place to be and lost huge amounts of money. So, one-decision stocks, it didn't matter the price you pay for those stocks, you were always going to make money, suddenly lost huge amounts of money.
02:33 And what you had then was a rotation and therefore things rotated, and it rotated because the value stocks and the concept of value investing really got its name in the ensuing five and 10 years. Before that it didn't even have that moniker but became very popular because the stocks were extremely inexpensive and cheap and therefore capital saw that opportunity and substantially appreciated those securities.
02:58 Tweedy Browne, Ruane Cunniff, Warren Buffett himself, of course, Gabelli, Peter Lynch, you name the stock pickers, had this huge period of time of significant outperformance. And why is that? Because the things they own were extremely cheap and discounted. And capital was looking for a new place to be that were cheap and discounted stocks.
03:17 And as we all know history doesn't repeat but there's certain analogous things that lead us to believe that there's a rhyme and therefore that's what we're thinking, the restoration of the fallen. The fallen in our view is active management and stock pickers and we think that that's something that has not worked for a long period of time and yet the elements are there, and therefore it's a great place to be today because that's where the opportunity is going to be in the next 10 years in performance. >> I'd love to hear
03:46 your thesis on why active management is going to make a comeback. It's obviously a topic of great discussion and debate. >> Yeah. Well, I think it's already happened, so the famous Wayne Gretzky comment is, I don't go where the puck is, I go where the puck's going.
04:06 And so the puck has been one place for a really long period of time. For private equity, it's been there for 40 years. And we all know why the puck is there because interest rates went from 15% to nothing a couple years ago and so leveraged returns clearly, multiples substantially increased and you put leverage on top of it, you're going to have a phenomenal return.
04:27 So the capital has flowed there and other things too have been the beneficiaries of that. And where the puck is going, or what I would say where the puck already is, is there's a lot of companies today in many different places. So in the small cap part of the market, we do think that there's a huge number of securities that have very discounted based on cash flows and future cash flows, the present value of future cash flows.
04:49 We also think a lot of those businesses are well positioned for significant growth because there are structural changes that clearly are happening to the world's economy and to the United States, North America's economy. So there's a huge opportunity and I would say that it's going to happen because for 10 years value investors have said it's going to happen.
05:10 I'd say it's already happened and it's ignored, and the quote that I would talk to is that David Einhorn who is a value investor clearly has said the last number of years my approach to investing is different today. I no longer expect just because I identify a company that's well positioned that has good investment attributes that in a year or two the market understands and appreciates those attributes and reprices the security.
05:36 So therefore I am going to make money based on the market's realization. Instead he's acknowledged, I don't expect the market to do anything. It stays there. So therefore these are companies though that are generating so much free cash flow. They are buying back stock, paying dividends, growing their businesses. So it's the proverbial Buffett comment from decades ago saying you want to own a stock that if the market closed for five years, at the end of that period of time the business you own is worth more money. These businesses five
06:03 years later are worth more money. So the cash flows they have, the intelligent deployment of those cash flows, all of those things mean you're going to make money without the market realizing it and repricing it. So I think we exist there today and I'm talking, of course our focus is really North American in many ways or industrial commodity things that may go outside the country, but I also think the same thing is true foreign markets. Foreign markets you can buy cash flows overseas in many markets for a lot less
06:35 than what you pay in the US, and so that opportunity is there and people know it and people say yeah but it hasn't worked and so because it hasn't worked they don't do it. And so, but these businesses have cash flows, the reinvestment of those cash flows, intelligent redeployment, and therefore the growth in the value of those businesses, that you make really good absolute and we think relative returns.
06:59 >> What you're saying is you don't expect any sort of multiple rerating when you underwrite a position today. >> In large part, we don't. In reality it happens because the other thing I will talk about, markets today as being extremely different, and we know this but we don't really incorporate it. More money today is invested passively than active, and of course ever before. So the market mechanism in pricing of securities is something that
07:32 really security analysis and individual stock selection is not something the market does. It buys an index, it buys a group, it does an algorithm, it does all kinds of things. So it moves capital around not based on thoughtful individual company-specific things. So our companies that we've had in the last five years, a number of these companies have had another phrase we talk about is value traps.
07:59 When people talk about value investing, one of the things, you get stuck in a value trap, and a value trap is really a business that has assets that are worth significantly more than the stock price. But assets, what are assets worth? Assets can only be valued when it generates cash flows because cash flows you can value an asset and what it might generate in an environment that is likely to happen is difficult to do.
08:24 And so therefore they're, we say it's a value trap and the value is chained in because it hasn't released the earnings stream. When that happens, we've seen this in the last number of years, whether it was Builders FirstSource or whether it was Tidewater, when suddenly the business earnings really do manifest and then people say, hey, that asset is worth a lot of money.
08:43 The stocks start to appreciate and they start to appreciate dramatically. And not only do they see the cash flows, they say, I can identify in two to three years time the cash flows will also continue to grow because the assets are well positioned, the supply is limited, the demand is greater than the supply, and so obviously those things get into pricing, the stocks move dramatically and then they get ahead of themselves.
09:04 >> In terms of the shift from passive to active. >> Yeah. >> Is there a specific change or is there something about the market today that you could really kind of pinpoint as like okay now the tide is going to shift, more to actively managed versus say last year, or how do you sort of time that shift? >> It's an interesting question because the answer to that is all bottom-up stock picking. It is the fundamentals of an individual
09:43 company and when they do manifest, the market responds to those things. So again, Builders FirstSource is a company that relates to the home building business that we invested in at the depth of the housing crisis and of course went down further after that because the business didn't recover immediately.
10:02 It got worse over the last 12, 13, 14 years. That business's fundamentals have manifested itself and it's grown dramatically and the stock's appreciated dramatically. So when the earnings do come then capital does flow into it. So the capital will eventually come. So Einhorn's comment about the market won't reprice it is, he doesn't know when they're going to reprice it.
10:23 The fact of the matter is they make money, they grow value, they buy back stock, they do those things. Eventually the market recognizes those facts and rewards that. And that happens on an individual basis. It doesn't happen necessarily as a group, the whole thing kind of moves, or I can't see that either happening necessarily that the group does better. Stocks will do better and where those stocks are potentially discounted. >> Even this year, Russell 2000 is wildly lagging the broader indices, would you expect that gap to narrow or is it more endemic to
10:59 the index you think? >> No, so that's one of comments we make. The Russell 2000 is a bad index and everybody knows that because a thousand companies don't make money. They're zombie companies. What are they? Of course, that's one of the beliefs that we have. The opportunity set really is in the zombie 1000 of the Russell 2000.
11:17 So there's a lot of companies in there that aren't making money, haven't made money, and therefore have been abandoned, and therefore have valuations that they don't trade at a Ben Graham 50 cents on a dollar. They trade at 30 cents on a dollar or 20 cents on a dollar.
11:33 When those businesses, because that's what happens when businesses are in a situation where they're not making money. You pull back capital, you consolidate not only the business itself but also the companies in that industry consolidate and you start to change the industry structure. So economics 101 really does work. Things adjust. The time it takes to do that people don't have the patience for.
11:53 Because today's time horizon is if it doesn't happen the next month I'm not interested. If you're going to tell me this is going to happen in three years time, like call me back in two years time and maybe I'll look at it then. So the willingness to make an investment today where you can buy a dollar for 30 cents because not only is it worth a dollar, there's a really good chance that the nature of the business because it's gone through a difficult period will have an earnings power that will make it actually $2 or $4. And if
12:18 you have the right management in the right company and the right industry, they consolidate and therefore they even change the nature of the industry that company is in and therefore substantially increase the earnings power of the business. And that's been our experience over the 40 years we've done this multiple.
12:33 >> Yeah, you mentioned Builders FirstSource. I don't know which one you want to start with, but let's go through a couple of the names that you think are good examples of zombie 1000 or the out-of-favor name that you picked when nobody else was willing to take a look at that name.
12:51 >> Well, so we'll do that just for classroom purposes. There's limited value today. We do own some Builders FirstSource. We do think the company is still well positioned. It has a lot of positive attributes. Of course, we first invested in it in May of '09. So this is pretty much the bottom of the housing cycle. You've gone from building 1.
13:13 7 million homes a year to building a half a million homes a year. The 50-year average is we built a million homes a year. You didn't have to build a new home because there were a million or two too many homes that were built and they were sold to someone who didn't have the capability to own the home. They got a mortgage from someone that they were going to default on, that they did default on.
13:31 So there's a million or two homes that had to be repositioned into the hands of an owner as opposed to the hands of a transitory owner who happened to get through a mortgage. So for two three years you actually built fewer and fewer homes each year. So the business got worse. So we bought it originally at 340. It goes to 170. We get in early.
13:51 Value investors always do that, do that too early. But we always continue. Our rule of thumb is, there were people who say oh it's down 20% you blow it out of the portfolio. No, it's down 20%, we watch it. If it's down 30 40% then we want to start to buy more of it because there's a really good chance that the valuation is moving substantially greater than the business is deteriorating, and likelihood things are happening cathartically in these businesses where capital's been withdrawn, people have left the business,
14:16 there's consolidation these days. So it is right-sizing those businesses. In the meantime we also had the opportunity because we look around the space, we found a company that had come out of bankruptcy. So we bought 22% of the company when it came out of bankruptcy, one of the larger competitors in the business.
14:33 So then again, what we normally do is because we think there's a really long runway for the corrective process as that business recovers, to go from a half a million homes to a million homes. So twice as many homes, you imagine the operating leverage you get associated with the distribution business. We increased our position and bought this other company and then I got on the board of the company, and we do that occasionally with our investments that we think there are all these opportunities for consolidation, understanding the
14:59 business better, understanding the opportunities that are in the business in the industry. We're more informed on having a seat at the table in terms of who's running the business and how are they allocating capital and how are they being opportunistic, because that's a critical difference, is when those difficult times happen someone who can be in a position to acquire other competitors, other assets at a fraction of what it would cost to build those assets, improve the situation of the company you have, reduce its costs but
15:30 also widen its footprint, substantially increases the earnings power of the business. And that's what happened. So BMC that we acquired the stake of, that I had gone on the board of, we reverse merged into Stock Building Supply. Builders FirstSource went out and bought the largest company in the business because again good things happen when the businesses stayed weak for a long time.
15:53 More people throw in the towel, give up, go away. And that's what happened. The Johnson family owned the largest distributor in the business. Didn't want to write another check for hundreds of millions in 2015. Said get rid of it. I don't want to own it anymore. And Builders FirstSource levered up to buy it and was a great acquisition that substantially changed the business. And then as these things were happening, there's also a positive, we also realized that in these cyclical businesses, there's never a straight-line recovery. So the stocks just go up and just
16:19 continue to go up and never come back down. Inevitably there's the pickup, there's the wait, there's the digestion period in the stocks. Then because funds do flow they see the stocks have moved, it's kind of an algorithm says this stock's gone up a lot, so I don't want to buy the stock. What did they do? I don't know what it does, but it's going up.
16:39 Stocks that go up go up. And so therefore, capital flows into it. And then when suddenly there's a hiccup or slowdown, and there may not even be a hiccup or slowdown, but the market slows down its movement, suddenly you get a reversal of that flow of funds and you get an outflow of funds.
16:54 And so Builders FirstSource over the ensuing five years as the recovery continued to happen and consolidation continued to go on, there were three four times where the stock was off 50% in that period of time. So the idea that you had the ability to once again put more capital to work when those opportunities came, because clearly the outcome could was identifiable generally and the general outcome was that the stock was extremely undervalued in that opportunity.
17:18 >> What was your, did you have a sort of an initial time horizon or expected time horizon as far as how long you thought you'd be willing to wait for the situation to improve? >> No. Yeah. Although even I do reach the point where I realize I should probably deploy less capital because I will be too soon.
17:42 I see too much the three to five-year number and therefore commit capital and frequently almost inevitably the three to five year ends up being a five to seven, and so therefore deploying a little bit less capital earlier on would be an intelligent thing that I should have learned to do. It's hard for me to do that, but what I don't do is I don't sell the stock because I also realize the recovery period and the growth is really dramatic and it's long-dated, and so therefore there's no reason to rush. And if you
18:12 double your stock and you sell it, then you're a fool because that's what's really going to happen, is you're going to make five and 10 times your money. And to walk away with two times, which I did, I did that back in this investment I talked about, the biggest loss I ever had was Ethyl Corporation that changed its name to NewMarket, and I doubled or tripled my money and I patted myself on the back, and eventually sold the rest of it at 10 times the money and eventually went to 20 times the money. So I was
18:34 foolish by thinking I was so smart having picked it. Then when I was right, patted myself on the back, sold the stock, took my profit and gave away most of the money. So >> yeah. >> Yeah. >> I think many of us have had that experience. I totally hear you on that. >> Was there an example? That's an example of a past one.
18:57 So one that's in the process of unfolding today would be, so I do own almost 6% of and I'm a board member of Tidewater, which is an offshore boat oil service business. So the oil service business is an industry that's cyclical, and it's one that I've invested in since 1976. So I've got almost 50 years experience investing in an extremely cyclical business that probably has gone through, there have been two massive consolidations, bankruptcy liquidations there, or three
19:31 bankruptcies by each company from the early 80s to like 90, that was the first period of time, and then from '84 through two years ago they went through the same thing. There were two three bankruptcies, they restructured. The first time they didn't get rid of enough debt.
19:50 The second time they still didn't get rid of enough debt. The third time it all got wiped out. The equity got created. So the industry goes through huge cycles and therefore people don't like that. So if you mention a stock to someone and they say I know that business is a terrible business, I end the story. But the fact of the matter is you buy this asset. That's what I do tell people.
20:10 I say, the company I want to talk to you about is a real estate company and what they do is they own real estate that no one's built a new piece of real estate in 10 years. A lot of that real estate has been demolished. It's been converted to other uses. So the supply of the real estate has dramatically come down.
20:25 In the meantime, the cost to build that new real estate is more today, probably twice as much as what it was last time that someone built that real estate. So I own this asset far below its economic value in what it would cost to replace and the supply has substantially been reduced and it takes years to build the supply back up.
20:44 In the meantime, the demand for that has really grown and suddenly the demand is absorbing all the supply and now suddenly instead of operating at cash flow break evens, you're starting to raise rates dramatically which all convert into free cash flow. And so you could see the free cash flow and you could see the rates and you can see the improvement, and as the rates roll over on vessels as they, or buildings as they come vacant.
21:09 You start to see it price to a number and it's going to price somewhere near the number of what it's going to cost me to build a new building because I may need a new building at some time because the demand continues to grow and the supply is limited. And then I say that real industrial real estate happens to be a boat that moves on the water and it moves oil and gas equipment from shore to offshore platforms and drilling rigs.
21:31 Now, if I told you it was an oil service company, you wouldn't listen to me because you don't want to invest in those businesses. But the fact of the matter is it's really a piece of real estate and it's industrial real estate that is far below its replacement cost and is in high demand and short supply and therefore has huge pricing power and generates very significant free cash flow.
21:49 And so therefore, based on its free cash flow, which should continue to go up because the demand's there and the supply is not, how's that not something you're buying for single-digit earnings that are likely to continue to grow? >> I'm just curious, when you started looking at Tidewater, given that it is in a cyclical market, did you do any work to assess where in the cycle you were entering the position? And what year did you end up buying the name initially? And where
22:26 were you in the cycle when you first invested in the company? >> Yeah. So of course I invested in the cycle when things were tough and things were bad and it was reflected in the price. So the Tidewater was trading at two bucks a share, three bucks a share. So the valuation had come dramatically down because it was leveraged, and the fact of the matter was the leverage wasn't going away and therefore had to be paid and couldn't be paid out of the cash flows of the business. So the cash flow, when I
22:54 first invested in it, so I went down to visit, Methanex has, they were moving a methanol plant from Chile to Geismar, Louisiana. And so in that process I went down to do a road trip and I'm in New Orleans. I go, who do I want to visit? Tidewater. I said I don't want to visit Tidewater.
23:14 The boat business is a horrible business. I know it's a horrible business. So even I who say I invest in these things because nobody wants to because they're horrible business, said that's a horrible business, even I, that's below my criteria, but had nothing to do, I went to go see them, and then suddenly I had seen they had renewed the fleet, they had new vessels, I got tempted. In the meantime the debt was a really odd structure. There was $800 million bank line of credit, they had drawn 300 million. There was 1.
23:39 2 billion of a number of insurance company obligations outstanding, all of it pari passu, all of it unsecured. So what the company did was it drew down the remaining $500 million of the bank line of credit. So suddenly had 500 million in cash, 800 million owed to banks, 1.
24:02 2 billion to insurance companies, all pari passu, all unsecured. So like, who the hell lent money to a cyclical offshore oil service company on an unsecured basis? I'm sure there were a bunch of people at banks who lost their jobs when that money got thrown out. And I figured with the cash and that debt situation, you could restructure the company and therefore preserve value for the equity.
24:19 And I tried to do that. I tried to, actually I owned 9.9% of the company. I tried to get on the board. I tried to say, listen, put me on the comp committee and I'm going to propose a comp plan that if the management can preserve significant value for the equity owners, they get a big equity interest to the business, because I figured some aggressive lender, some aggressive investor was going to buy the debt, try to restructure the debt, and therefore pay them off in the same way.
24:39 And they pay them more money to bankrupt it than I would pay them to not bankrupt it. So, it turned out it didn't work. They went through bankruptcy. It came out of bankruptcy. So I was too early to it. And I thought there was a clever way to do something with the debt structure and I just, >> So your equity went to zero initially.
24:56 >> No, I got 2% of the equity in the restructuring. So substantial, I lost substantial amount of money in that process. >> And yet you still stuck with it coming out of bankruptcy. >> Well then I bought more of it because when it came out of bankruptcy suddenly it had no debt, and well it had 400 million of debt and 400 million in cash. So it had no net debt.
25:16 It was breaking even. It was the bottom of the market. The assets traded for far less than what the assets are worth. So, when does the recovery come? I'm not sure when it comes, but I am buying a dollar for 20 cents. And so, if it takes 10 years for it to happen and it goes back to a dollar over 10 years, I'm going to make good returns on that.
25:33 And the fact that I was premature in my investment there doesn't change where I am today. And so, where I am today is it's a whole new decision-making set. And therefore, to put money to work today is very different than where it was when I put it to work then. >> How long does the average boat last in their fleet before they can buy a new one? >> The boats probably last 20, probably 30 years.
26:00 So I do think that there's an odd thing going on with oil service today. So my perspective is that it's unlike it's ever been in the past. When I first invested in the business in the early 70s, it was the infancy of the offshore business. The only place you did offshore work pretty much was in the United States and you didn't do it in the rest of the world.
26:18 And today, 10% of the fleets in the US and 90% of the fleets around the rest of the world. So looking for oil and gas offshore has gone to a global business. So these originally were all US companies and today most of them are not anymore, or if they are most of the business is not in the US. So the business has evolved.
26:38 But what's also happened to the business is you are spending most of your time and effort to develop new oil and gas fields and so therefore what's the future of new oil and gas and what's the demand for that and what's the future look like for that? The future for that clearly is a lot foggier and uncertain and the only certainty about it is that there's a general belief at some time it's going to wane, and so therefore this business is one that probably is not going to grow and probably in terminal decline.
27:04 Now when does the terminal decline happen? How fast does it happen? It's an uncertainty. So, as a result, am I going to build a new boat? Am I going to build a new rig? Why would I build an asset that has a 30-year life to it that I don't know in 10 years time if there's still enough demand for it? So, I don't build it.
27:21 So, therefore, there's an odd thing that's happening because that's cyclical businesses. The cure for high prices is high prices. That's the old axiom that's been around forever because high prices mean high profits. High profits means new capital. That means you build too much of it again.
27:35 So, you go through the same cycle again. The same cycle is not so quick to happen. Who's going to spend the money? Who's going to buy the new asset? I don't want to buy the new asset. In the meantime, boats are different than rigs in terms of the technological capabilities of a boat are substantially different than the technological capabilities of a rig.
27:52 So, a new drill ship with dual derrick and all the equipment on it can drill half the time of an older rig. And so, therefore, a newer rig has economic value to it. A boat is a boat is a boat. And so my thought is that the boats, the ones that were 30 years old could still operate.
28:12 They're not, that it's technologically unadvanced anymore. And so therefore you can do things. So I think the life of the asset will probably end up proving to be longer than it's historically thought to be, given I'm not going to build a new asset. I figure out how to refurbish it. I extend the life of it.
28:30 Do those things which cost a lot less money which would reduce the risk, they've got a supply problem because historically that's what's hurt these businesses is new supply comes and then kills the goose that lays the gold that they get. So new something not on the horizon. >> The stock's down 50% or so over the last year, so are you buying more now because you feel like people got the cycle wrong and the supply demand imbalance is even higher now than it was a year ago? What's your
29:01 positioning today given what's going on? >> Yeah. So a couple things. One is the flow of funds today and the market's giving opportunities to thoughtful investors who look at the fundamentals. A year ago when the stock started at 10, 12, went to 30, went to 60, went to 100.
29:27 At some point there, it got momentum beyond where the earnings were moving to and capital flew into it. So, it got added to the S&P small cap index. When it did that, the market had to buy six million shares of a company with 52 million shares outstanding without regard to the fundamentals. They could be falling apart. It's okay.
29:44 I have to own it because it's in the index. So, capital's flowing into the thing. So, the stock shouldn't have gone over 100. It probably should have stopped someplace in 70 or 80, probably was a price that appropriately looked at the opportunity where it was, where it's going and would have done that.
30:00 Instead, it goes to 100. So, the market gets carried away. So, there are opportunities that the flow of funds today do provide because when the cash flows manifested, then they went too far too fast and moved into the opportunity. >> We normally reverse. >> That's right. And now we normally just hold on to it because we still think it's still worth quite substantially more.
30:24 In this case, we actually did sell a little stock, and so I sold some stock at 105 and 107 in May of 24. And so therefore, I did lighten the position some, and not only did I but a member of senior management including the CEO sold substantial amounts of stock over a hundred. So clearly telling the market that maybe it was ahead of itself or there was an opportunity.
30:47 So we did that. >> Yeah. >> Since then. So it's not just what do I do, more importantly it's what is the opportunity this provides for the company, because that's one of the reasons why I want to be on the board, because I want to work along with management to say okay the market's going to get it wrong, if the market gets it wrong what do we do and how do we respond to that, because in 22 and in 23 what did Tidewater do, because of its restructuring from the bankruptcy, the strong balance sheet,
31:18 the cash flow that it did have, some cash flows. We were able to buy other guys. So, we bought in June of 22, we bought Swire Pacific's fleet from Swire Pacific, the Hong Kong based conglomerate that owns Coca-Cola and Cathay Pacific. Had the poor sense 15 years earlier, putting money into owning offshore boats that they should never have done.
31:40 They wanted to get out of it for 5 years. They couldn't get out of it. They couldn't get out of it. Someone made up a bid. It wasn't good enough. They walked away from it. They probably kicked themselves they didn't take it. They sold it to us for less. They capitulated at the bottom of the market.
31:51 And so we bought for $200 million 50 vessels that probably would cost $2 billion to build new. So we bought a dollar for 10 cents. And those opportunities come to the well-financed, well-managed companies, and to have a role to play with them to say yes, let's, we need to do this and let's use more cash and less stock if we can, because then that will be a better way to do it, that will be more per-share value accretive to people, does that.
32:15 A year and a half later, we then bought 37 more vessels and we bought that for $600 million, and we borrowed all the money to do that because we're going to generate in the next two to three years that amount of money to pay off all the debt. So yes the interest rate is 10%.
32:31 But the return on investment is 30%. So therefore the cost of capital definitely makes sense for us to do that. So for us to acquire assets far below their economic value, that is the cash flow generative ability, is increasing the per-share value. So we're changing the company, is changing what it's worth.
32:48 Not only are you buying a dollar for 30 cents, suddenly the dollar is now worth a $150. And so therefore that continues to happen. And what we were able to do in the beginning of the year, management astutely said the market's got it wrong. Our business is not deteriorating. The cash flows are strong, they will strengthen probably most likely too, and so therefore the market's got a valuation wrong.
33:11 So the company used its full capability to buy back $90 million worth of stock in the first quarter and we did that at $39 a share because the market gave us that opportunity because they had it wrong. So the markets, >> well plus there was the tariff thing and there was other negative pressure on the market that maybe helps. >> But the tariff things have relatively, one could argue that the tariff thing may slow down the world's economy and the world's economy slows down maybe the demand for oil slows.
33:36 So all of those are kind of like third degree fourth degree kind of things. We're not a tariff-focus-at-risk company. >> Yeah. That makes sense because tomorrow it'll happen. I didn't know that you were on the board of so many names in your portfolio, but so do you personally own shares of Tidewater in addition to your fund as well, or >> Well, of course you do, if you look through all my filings, you look through the form fours and you look through the 13Ds and you look through
34:08 all the information you'll see the accurate, so there's a fund Ravenswood that I managed when I worked at Gabelli, there's a separate account business we have, and then I also have some other investments on the side, but I also have personal investments, and a number of times I bought stock personally, and that is, it's a full position for the fund and yet I think it's a great opportunity and so therefore committing more capital for it would be problematic, to commit more capital for me was not problematic.
34:40 >> Super interesting. Yeah, that's super interesting. Now you had mentioned management being astute. How important is the quality of management to you when you're underwriting a position initially? Are you spending a lot of time getting to know management before that first initial investment or is it something you obviously pick up intel over time as you sit on, certainly if you're on the board, but kind of in the beginning, how important is that as part of your overall thesis on a stock? >> I would say that every investment is a mosaic and you look for everything you possibly can and you know that there's going to be three or four or five things missing from the mosaic that you would prefer to have. And I do think that the role of management in these businesses going through difficult times, consolidation opportunities for acquisitions, all of those, the quality of the management is a critical factor in them being able to execute, to therefore be opportunistic,
35:41 and so therefore that's really important. That said, in our investment that we made in BMC post bankruptcy the business was such that, when I first invested in it I wasn't so sure about the quality of management, and then when I came on the board and was a director I realized that the management really wasn't very good but the business was a great business, and the Buffett comment, would you rather have a business that even an idiot can run or a really smart
36:12 guy and a difficult business, you sometimes the business is such that even if he's not the best, the opportunity plays out, and it did play out. Had I not bought it because I was concerned about the quality of management that would have been a huge mistake. >> You mentioned international markets as being a place of opportunity right now.
36:32 Can you be more specific about where you're seeing the biggest opportunities internationally? >> Well, so I don't do as much internationally personally. So the Robotti and Company, because in addition to picking stocks that we think are really interesting, attractive, undervalued, all those things, we accumulate people, and there are 14 people here who are looking for stocks to invest in and deploy that in many different ways.
36:59 And so one of those people is Isaac Schwarz who runs our global fund and has done that for almost 20 years. And so Isaac lived a year in Singapore and five in Hong Kong, travels all over the world, looks at other things. So therefore he has that fund and that fund's done extremely well the last number of years.
37:16 And one of the companies that is extremely interesting, inexpensive stock is Halyk Bank. It's one of the large positions that he has and it's the largest bank in Kazakhstan and it has a 35% return on equity. It trades at book value. So therefore it trades at three times earnings. It pays out half that money almost in dividends.
37:36 It accumulates more capital. It grows capital. Kazakhstan's an extremely interesting country. It's long uranium, oil and copper. And so therefore, we think critical materials, there are two secular trends that we see out there. And one of them is energy and the need for energy of all sorts including renewables.
37:55 And so therefore, in renewables, you're going to need uranium for nuclear and you're going to need copper for electrification of everything. And so therefore, those are critical materials. And so the country is well positioned. The finances are strong. The fact of the matter is it's a counterbalance even to Russia.
38:13 It's been the beneficiary of Russia's invasion from Ukraine. The migration of people and intelligence into Kazakhstan has been a significant thing. It needs to also stay independent of both Russia and China. It's two neighboring countries who are difficult places, countries to do business with, but you got to figure out how to do business with them.
38:33 But you also want to make sure they stay on their side of the border. And so to do that, it's good to be friends with somebody who can help in that process and that's the United States. So we think that there's a lot of dynamics that make that an extremely interesting, and he has a bunch of other investments too that we think are extremely compelling.
38:50 >> And then as a bottoms-up guy, how relevant is macro to you and just what part of your, how much of your process do you feel like, do you find yourself focusing on macro considerations? Especially today given it seems like so much of the market is hinged on macro. Does it ever keep you up at night or do you kind of ignore it? What's your take? >> Well, one of the macro factors that definitely permeates a lot of the things we're investing is
39:24 the belief that North America is extremely well positioned, and the idea of industrial businesses doing well here for the next decade, two decades makes all the sense in the world because industrial businesses tend to be energy intensive and the energy cost in North America is distinct, separated and substantially better than it is the rest of the developed world. So we have an overabundance of natural gas.
39:48 No matter how much we build export capacity, no matter how much we build facilities that consume natural gas, our ability to continue to produce more and more natural gas is identifiable. And we have a decade, two decade long advantage where energy costs in North America are lower than the rest of the world and that's sustainable given the nature of natural gas and the difficulty in transporting it to other places that have a need for it.
40:12 And so that means that there definitely will be the idea of industrialization because of the economic advantage. And so that's not because Biden had the IRA and gave away carrots to people to incentivize to use that natural gas through one way or another. Or it's not that we use a stick to bat away other people who therefore want to do other things.
40:32 The sticks and the carrots go away. The fact of the matter is we have much lower energy costs than the rest of the world. You're an energy-intensive business. You want to do business. You want to be based here. If you're Nippon Steel, one of the largest steel companies in the world, you'll want to be in the United States because that industrial activity is coming here.
40:48 You see the Japanese companies wanting to do more and more here in North America. So the North American opportunity for energy means that there are going to be structural advantages that will translate into investments in capital, higher returns on capital because you're going to have excess margin because you still compete with a product in the world market and the price is set by somebody with a much higher cost than you are.
41:10 And that's a sustainable competitive advantage. >> Speaking of energy, have you looked at any of the metallurgical coal companies? I know Manish Pabrai's got long positions in a couple of other names. >> I don't, I've looked at them. Two or three times I looked at a small investment in an Australian company that is soft met coal as opposed to hard met coal which isn't quite as good but it's okay because the demand for met coal in India is going to be so great because India's steel
41:42 making is going to double in the next 10 years and therefore you need met coal and they're building all these new steel making capacities in India which are all blast furnaces, no one's building an electric arc furnace to therefore substantially reduce the carbon output. Because you could make steel for a quarter of the CO2 if you use an electric arc furnace.
42:03 There's no electricity there. So the electricity comes from burning coal. So therefore, you're doing the same thing. So you build a blast furnace. Now, the blast furnace you're going to build is going to operate for 30 years, if not longer. And it's going to consume coal. And therefore, that means you're going to produce an awful lot of CO2 for all that steel you're going to make.
42:20 So the environmental impacts of what we're doing around the world are really interesting, how you focus on, and we are, it's a concerning issue without a doubt, but there are definitely things going on that are, I don't know how you fight that trend that's too strong. So, I do believe in met coal.
42:35 Two or three of the other people in the office do own met coal in portfolios that they manage. I see the interest in it. The fact of the matter is, what do they say? I can't kiss all the girls. I only have so much capital. So I like the ones I have and so therefore am I going to sell that, take a gain, put it into the other one? >> Right. That makes sense.
42:58 Now as a small cap guy do you have any view on interest rates? There's been a lot of talk in the news about Powell. I would imagine, this may not be true, but if Fed funds do get cut, you could argue maybe small caps disproportionately benefit. Do you think that's the case or do you have a different take on rates entirely? >> So my view is that everybody spends way too much time thinking about what the Fed's going to do or not do,
43:37 because the critical question when it comes to interest rates is what's inflation? Because inflation determines interest rates. The Fed doesn't determine interest rates. If inflation goes down, then interest rates will come down. If inflation goes up, interest rates will go up. And the Fed will follow that process. And that's what the argument today is, that maybe it could be more aggressive at following because inflation has tempered and therefore be more aggressive in pulling down rates.
44:01 But it doesn't matter because if inflation comes back up, the Fed's going to increase rates again. So I think you focus on the tail and not on the dog. The dog is inflation. What happens to inflation? Now there we actually do have a macro view that is, the risk associated with higher inflation is substantial. So let's think back to 2022.
44:27 So was that an anomaly or was that a precursor? What happened? Inflation picked up significantly. Interest rates picked up significantly. When interest rates pick up significantly because inflation's up, that means every cash flow is worth substantially less. I don't care what business it is. I don't care if it's fixed income. There's no saving yourself at a fixed income if suddenly those cash flows you're going to get from worth a lot less money because there's inflation.
44:50 So the idea that both the bond market and the stock market perform poorly in 22. It's kind of like, I don't know how anybody was amazed at that idea. All cash flows are worth less whether it's a bond or whether it's stock. And theoretically the stock's better positioned because over time he could potentially grow those cash flows.
45:08 The bond can't grow its cash flows. So potentially it gets hurt even more. So the idea, and so what happened in 22 was a substantial repricing, that risk exists today because we all love the phrase from Rudiger Dornbusch, professor, German professor taught at MIT in economics, things take longer to happen than you think they will and then they can happen faster than you think they could.
45:35 So everyone knows that you have to be concerned because one of the things that causes inflation is government buildup of debt, and so whenever the government builds up its debt inevitably end up in a period of time inflation follows. Now of course for 15 years people have said that and the government continues to rack up debt and it hasn't happened.
45:50 So therefore because it hasn't happened then everybody says it isn't going to happen as opposed to no, the problem is getting bigger. It's getting more obvious. There's no stopping it. It didn't matter which administration is in, there's going to be more deficit, the deficit is going to pile up, and so that is an issue. The other thing is we do think that whether that's energy that we talk about and therefore the movement of where you make things and how you do things differently,
46:18 or people talk about deglobalization, we think that's a horrible misperception. What it really is is the evolution of globalization, and that is who's competitively advantaged has changed, and as that competitive advantage changed where you do business changes, and we think that there's clearly a movement of business that is moderating China's growth that it's done over 40 years and it's moving other places, and therefore inefficiencies in supply chains and you can't make it as effectively as China has been able
46:48 to do things, and so therefore it probably costs more money, so we think there's plenty of inflationary pressures, and of course if you do throw on the fact of it, we want it made here and it costs more money and we'll put a tariff on it. That means it's going to cost more money. So, there are a lot of inflationary pressures out there that the world's ignoring.
47:06 And so, we think inflation is actually the normal course of events. Economic history shows that inflation is a recurring problem and it hasn't happened. Just because it hasn't happened doesn't mean it's dead and gone. And so, we think that 2022 potentially was really a cautionary tale that capital's not responded to.
47:26 And for us to have a more persistent higher level of inflation which will mean we will have a higher interest rate because it has to be something that has a real rate of return to it. >> Yeah. What's hard is netting out the effects of technology with the other kind of forces at play, tariffs, whatever, like cost of labor, all those things.
47:50 >> We live in a digital world. Technology clearly is a moderating factor. The fact is it's a physical world. And there's nothing that speaks to that better than what's really going on with the artificial intelligence, the build out of artificial intelligence. How many data centers do we have to build? How much more power do we need? Where do you get the power from? Where do you get the copper from to have the electricity to electrify all these kind
48:11 of things? There's clearly a physical demand on things. Where's the cement you need to do that? Where's the steel you need to do those things? So, you still need, we haven't gotten to the point where it's all in the metaphysical world. It really isn't, tangible things. There are tangible things.
48:25 Now, yes, the impact on the total economy is less than what it historically has been. And so therefore, that may moderate what the inflationary impact is as a percentage, but the assumption that it's gone away and there is no risk to it because we can get anything and everything we want that moderate prices and has no inflationary effect.
48:44 It doesn't seem. >> Yeah, but it sounds like you're long energy. >> Well, the template for energy in my mind is China, because China really does kind of what it wants to do. It pays lip service to other people. But what is it doing? It is the biggest builder of renewables.
49:02 And so it is, and clearly, of course, it wants to do that because the more it builds renewables, the less it has to buy oil from the Middle East or natural gas from us. And it doesn't want to buy oil from them and gas from us. So to the extent I got a renewable, I don't have to do that.
49:18 So therefore, they are hellbent on that. At the same time, they're building new coal plants, they're building new nuclear plants because what they're really saying is you need all of it. We can't do enough of it just building out renewables. We still need all these other things. And so therefore, I think that the world is in the same situation.
49:36 You need more energy. And in theory, China's need for energy in many ways is probably less than a lot of other countries on a per capita basis because there's the evolution of the Chinese economy. So the Chinese economy is not what it was 40 years ago when it started, it's this huge run.
49:51 It is maturing and as you mature, therefore your energy consumption actually moderates and so logically it's probably going to moderate its energy consumption. Now as the rest of the world probably picks up some of the slack and growth whether that's India, Southeast Asia, Brazil, you name the place historically when you start that escalation and those economies grow the energy consumption appetite just gets huge, and so therefore the demand for energy consumption in those places is dramatically higher, and
50:20 so I do think you're migrating from a place that's moderating its energy consumption to places that are at the inception and earlier in terms of their energy demands broadly. And if you want solar and you want wind you need steel and you need cement and you need all of those tangible physical things and you need copper, so you need all these things, that are where you going to get it from, they are declining, and therefore they're hard to do. >> Bob, I know we've taken up a lot
50:48 of your time here, maybe to end, I was curious, you obviously have a focus on small caps but is there a large cap that has piqued your interest of late? Or maybe an area that might be large market cap but out of favor. We've even seen it with tech for example, you mentioned 2022 when big cap tech collapsed.
51:21 Now we're seeing healthcare as a sector not doing so great versus some of the other sectors. Just if you put your contrarian mindset on, I'm just curious what you're seeing today that has maybe piqued your interest. >> Well, so I don't know what large cap is because large cap really is like some number that's like hundreds or hundreds of billions of dollars.
51:43 I don't know what midcap is, because midcap you, >> Yeah, maybe let's say 50 and up or something. 25 and up. You figure out. >> The two biggest cap companies that I see I think are interesting, one of them is just recently and it got smaller, and that is Holcim the cement company, the Swiss-based cement company spun off the US business, they're probably about equal size, and so I think that business is really compelling and the opportunity for it is great because it's in a transformation as they're
52:11 doing things with cement today and materials and reconstruction, refurbishing and energy improvement in terms of old buildings and therefore refurbishing them. So there's a huge growth opportunity I do think and there's barriers to entry to the business and the valuation's modest.
52:28 So it's got a whole bunch, and they've been very acquisitive and done great deals in terms of growing the business through acquisition. So looks to me it's a pretty impressive situation, and to have spun off the US business and kept the rest of the business. It's not a European business, thinks in a European mindset. So I think that's an interesting compelling opportunity.
52:43 And the other one is steel, I think is something that on a basis makes a lot of sense. ArcelorMittal is the second largest steel company in the world. It does business in US, Europe, Brazil and in each of those markets it's one of if not the top competitor, and it does it in India and of course the Indian market's in the process of exploding over the next number of years.
53:02 So these are businesses that are defined as capital intensive crappy businesses. They generate free cash flow. They buy back stock. They pay dividends. They make acquisitions. So the deployment, these businesses are generating substantially more cash than they need to manage the business and therefore generating excess capital and doing extremely intelligent things with the excess capital including recently ArcelorMittal bought out Nippon Steel in one of the businesses they have in North America.
53:31 So they substantially increased their North American footprint because North American steel is what you want to make because the demand's there and you have internal supply. You've got your own met coal. You've got your own iron ore. You've got blast furnaces. Therefore, you use less CO2 in making the steel.
53:49 So, therefore, you're environmentally improved. North America has the most environmentally positive steel making in the world. And that won't change. We are differentiated. Not that that gets us extra money for it, but that is a fact. So those are two larger cap companies that I think are extremely complex.
54:07 >> Yeah. I know of Lakshmi Mittal. He's obviously like a very famous guy in India. >> Right. >> But that's certainly, >> it's a steel company that's grown those businesses, done those things and bought back 35% of the outstanding stock over the last six years. >> So we're going to end with a couple questions from the audience here.
54:28 So one is about running your firm. And the question is, within Robotti, does each PM have a certain AUM in their own portfolio or how is the firm organized in terms of? >> There are different people who run different pools of capital who invested.
54:53 So I mentioned Isaac, one of the other people is Curtis Jensen. So Curtis was at Third Avenue, was a chief investment officer there and joined us in 2016, runs his own fund. His fund definitely has a European orientation to it and he's substantially outperforming the market over the last year.
55:10 So therefore again that's another application of things overseas are really mispriced and undervalued and Curtis is someone who's deploying that, and there's a number of other people who run other pockets of capital too, and they tend to be, there's a sole person who makes decisions on those portfolios, and those other portfolios it's not me.
55:27 And one final question, one of the guys had mentioned that Tidewater is trading at roughly 16 times EPS, BLDR similar multiple, where are you seeing screaming buy opportunities where companies trading at sort of the single-digit price to earnings ratios?
55:52 >> Yeah. So when you do get to single-digit P multiples generally the market does realize that and react to that. So when Builders FirstSource started to generate a lot of money the stock appreciated dramatically. Now I would say the opportunity is in the value traps unchained.
56:15 So one of the companies that we bought last September was Five Point Holdings. So Five Point Holdings is a real estate company, has four main assets in California. The assets worth huge amounts of money. Three of them don't generate cash. So what the hell are they worth? And so therefore in the last two years, three years, they started to generate cash.
56:34 Instead of burning cash, they're generating cash. They're now on a cash flow basis. No net debt. And it's going to make $200 million this year. The thing trades at $800 million market cap, $900 million market cap. So it probably trades at a single-digit free cash flow multiple of the business, and the other assets are going to like fall in line, we think, and substantially increase that cash flow generative ability.
56:57 But until that happened two years ago, the stock was a zombie. No one wanted it because it was burning cash. I don't know what those assets are worth. So that's probably one that does trade at over 20% free cash flow yield. >> And so but even Tidewater today, what do we do? We did $300 million last year.
57:20 So 50 million, is it three billion, so it's around a 10% free cash flow. The company has already put out reports in the past, if you look back six months, nine months, a year ago, that say at these day rates with this utilization, can the company do a billion dollars in terms of EBITDA? Does it do close to that in cash flow? And so therefore, is it trading at a low single digit of what the cash earnings should be from the business? Because the business is misunderstood because everybody thinks
57:48 the boat companies and the rig companies are the same thing and they're not. The rig companies work only on active new drilling. The boat companies 50% of what we do is we service offshore producing platforms and those generate cash. Doesn't matter where the price of oil or gas is they operate.
58:07 And so half of our business we have all the time. And then part of our business is we support drilling activity which is moderated some, and then part of it is we also support new field installation and equipment. So we probably almost do as much business in the new field installation. So therefore our business, the visible thing that slowed down the industry, the drillers, we have a different business impact but yet people don't recognize that fact.
58:36 So >> yeah, that's super interesting Bob. >> Then the other industry I would say is lumber. There's a couple of lumber companies that trade for two times normalized earnings. A fraction what it would cost to build a business out, and Trump can do all he wants to complain about Canadian lumber.
58:55 A bunch of the trees you need God planted in Canada. He didn't plant them here. He can't move the trees. So that's where the trees are and that's where the trees are needed. And those trees will, and the Canadian companies, most of their business is in the US, so they're already in the US. So you buy these businesses at a very depressed price for lumber at a very reduced price of what the normalized earnings.
59:22 Many of them have net cash on the balance sheet. So therefore, very strong financial position. So you can wait a year or two. In the meantime, capacity continues to come out of the market because pricing has been tough. So the supply has come out and demand's moderated. Definitely demand will go back to a normalized level, and when it does the price goes back to normalized level and the earnings manifest themselves.
59:42 But again that is a value trap trapped until the price of lumber goes up because the demand then exceeds the supply, which is visibility to that happening. That's when the earnings will be there and that's what you do and you pay a fraction of what the power of the business is. >> But people should be looking at Weyerhaeuser and Sierra Pacific and a lot of these names.
1:00:02 >> Well, Weyerhaeuser is probably okay, but Weyerhaeuser is a better business with a higher valuation because they're not just in the lumber business. They own timber, they own lands, people like timber, they like lands. There's a repeatability for it. There's a yield that you get from it.
1:00:14 So you're happy to get a 3 or 4% yield, and so Weyerhaeuser, but the Canfor, West Fraser, Interfor, those are the three Canadians that have a lot of business in the US and they're a lumber company, and so those businesses we think are very discounted in terms of valuation today. >> Bob, this was incredible.
1:00:32 I feel like we covered a lot of ground. I'm going to have to rewatch this and just go through all the different segments and try to fully understand all your points. >> The good thing is what we do, cyclical commodity businesses people have gotten away from. They don't do that.
1:00:52 They've learned. I don't do that. And so value investors don't do these things anymore. Don't tell me it's the valuation is cheap. I don't want to own it, or because it's a commodity business. So therefore that aversion clearly presents part of the opportunity. >> I think that's well said.
1:01:11 Bob, thanks so much for doing this. We'll certainly be in touch and hopefully get more of your wisdom in the future as well. >> Well, I don't know if it's wisdom or not, and I'm probably 80% right and 20% wrong. I recognize that. >> Amazing hit rate. >> All right, thanks Bob. >> Great. Take care.
1:01:29 >> Take care. >> Bye. >> Bye.