Guru Mohnish Pabrai (Trades, Portfolio) has released a new Uber Cannibal portfolio.
The Uber Cannibals is a group of five companies that have succeeded in purchasing large quantities of their own shares in the course of the last 12 months. They appear to be consuming their share count. It has been discovered through academic research that these so-called cannibals tend to outperform.
An appraisal of the set has brought a red flag and some commonalities to light.
Pabrai's Dhandho Junoon ETF is built on the following three pillars:
- Share buybacks.
- Spinoffs.
- Select value manager holdings.
He is likely interested in the subject because the ETF incorporates the strategy.
According to a recent paper referenced by Quantpedia, Uekoeter and Evgeniou in 2015: The portfolio of the first category of companies, where we hold stocks for a month after the buyback announcement, is an indication of “abnormal” returns compared to the IWM market index of 16.3%.
Although I don’t always agree with academic anomalies, I agree that firms that buy back huge numbers of shares are more likely to be interesting investments.
Like dividends, it is one of the means of returning capital to investors, and the potential is maximized by CEO groups that are highly successful as depicted by William Thorndike in "Outsiders."
Dividends can be a disadvantage when taxes come into the picture and a wide range of managers prefers to increase the assets of the companies that they are running. Academics have come to the conclusion high asset growth rate correlates with underperformance. Buybacks result in negative asset growth rate putting cannibals on the right side of that research as well:
The Uber Cannibals as selected by Pabrai’s algorithm for the 2017-2018 phase are:
- Lowe’s Companies Inc. (LOW, Financial).
- NVR Inc. (NVR, Financial).
- The Hackett Group Inc. (HCKT, Financial).
- Select Comfort Corp. (SCSS, Financial).
- Willis Lease Finance Corp. (WLFC, Financial).
Last year's list also had NVR and Lowe’s.
Reviewing the set I noticed the cannibals are generally asset light and don't pack much debt. Very few sell-side analysts are checking up on this handful of companies.
The only thing that's a little disappointing is how only Select Comfort and Willis Lease trade at a level of EV/EBITDA where they look like good opportunities in an absolute sense.
Disclosure: Author has no position in any stock mentioned.
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