Forget the stock market's shiny winners. There's hidden money in the losers, says this veteran manager

By Barbara Kollmeyer

Critical information for the U.S. trading day

Another day another record close for the S&P 500? Equity futures are pointing in that direction on Wednesday, with tech in the drivers seat after upbeat Netflix results and hopes riding high for Tesla earnings later.

Those and other Magnificent 7 stocks have made investors a lot of money, but what about the companies no one wants to own? In our call of the day, Bob Robotti, founder and chief investment officer at Robotti & Co. and managing director at Ravenswood Management Co., discusses the art of investing in unloved, mispriced companies.

"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), 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), 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

Stocks SPX COMP are moving higher, as Treasury yields BX:TMUBMUSD10Y BX:TMUBMUSD02Y drop. The dollar DXY is down and gold (GC00) and oil prices (CL.1) 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.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              4,864.60   2.65%  1.74%   1.99%   21.12% 
   Nasdaq Composite                                                     15,425.94  3.84%  2.16%   2.76%   36.35% 
   10 year Treasury                                                     4.11       0.12   31.26   22.89   66.18 
   Gold                                                                 2,026.80   0.89%  -3.00%  -2.17%  4.09% 
   Oil                                                                  74.48      2.25%  0.89%   4.42%   -7.41% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

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

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

Netflix shares (NFLX) 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) are down on a disappointing forecast from the chip-industry bellwether. Dutch chip equipment supplier ASML (ASML) (NL:ASML) reported a big gain in orders.

EBay (EBAY) looks to become more "nimble," with plans to cut 1,000 jobs, or 9% of workers. SAP (SAP) set out a plan to cut 8,000 workers as it focuses on AI.

United (UAL) 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 showed growth speeding up in January and a recession still some ways away.

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.

Read: This is the mistake investors are making in thinking about a second Trump presidency, say UBS strategists

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Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

   Ticker  Security name 
   TSLA    Tesla 
   NFLX    Netflix 
   NVDA    Nvidia 
   DWAC    Digital World Acquisition 
   NIO     NIO 
   AMD     Advanced Micro Devices 
   AAPL    Apple 
   BABA    Alibaba 
   PLUG    Plug Power 
   AMZN    Amazon.com 

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-Barbara Kollmeyer

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01-24-24 1042ET

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