In December 2016, Mohnish Pabrai (Trades, Portfolio) co-wrote an article on Forbes.com that introduced the "Uber Cannibals," companies that were aggressively buying back their own shares.
The value investor recommended buying these companies and holding them in a portfolio for a year based on the observation that companies that repurchase large quantities of outstanding shares tend to outperform the market.
Impressive results
So far, the strategy has achieved quite remarkable results. At the end of March 2019, $100,000 invested in the portfolio, and rebalanced every year, was up 36.7%, outperforming the S&P 500 index, which returned 32.4% over the same time frame.
At the end of the first quarter of 2019, Pabrai picked five new "Uber Cannibals" based on their share repurchase activity. The five stocks he selected were Sleep Number Corp. (SNBR, Financial), Corning Inc. (GLW, Financial), Asbury Automotive Group Inc. (ABG, Financial), Quanta Services Inc. (PWR, Financial) and Allison Transmission Holdings Inc. (ALSN, Financial).
Of these, the first two featured in the prior year's portfolio while the last three were all newcomers.
Portfolio struggles
So far, it looks as if the portfolio is struggling to match the positive performance it has achieved in the first two years of its life. Every single stock is underwater since the end of March, and all but one are underperforming the S&P 500.
Asbury Automotive Group Inc. is the only stock that has achieved a positive performance since it was included in the portfolio at the end of March. The stock is up 27.1%, outperforming the S&P 500 index by around 23.6% excluding dividends.
The worst performer is Corning Inc. The glass manufacturer has underperformed the S&P 500 index by around 25% so far this year, excluding dividends. The second worst performer is Allison Transmission Holdings Inc., which has underperformed by approximately 15% excluding dividends.
These results are revealing, but I should caution that we are only five months into a 12-month holding period. There is a lot that can happen over the next seven months.
Long-term buybacks
Corning, in particular, seems to be facing short-term market headwinds. The stock dropped substantially after the company published second-quarter results of the end of July, revealing continued challenges for its large optical communications business. Problems in this part of the business led management to mute expectations for the full year.
However, the company is continuing to commit to its long-term goals outlined under its new 2020 to 2023 Strategy and Growth Framework. As part of the framework, Corning plans to invest $10 billion to $12 billion to drive growth, while returning $8 billion to $10 billion to shareholders through dividends and stock repurchases.
Based on its current market capitalization of $23 billion, this is a tremendous capital return from the company, and is worth waiting for, in my view. In 2018 alone, the company returned nearly $3 billion to shareholders with buybacks and dividends.
So far this year, the company has deployed $736 million based on its first- and second-quarter earnings statements.
Small-cap buybacks
Sleep Number has also been returning hefty amounts of capital to shareholders this year, despite the company's market underperformance. With a market capitalization of just under $1.3 billion, in 2018 the company spent $270 million repurchasing its own shares. So far this year, it has deployed roughly $100 million on buybacks.
Asbury Automotive Group Inc. is the only company that has outperformed the S&P 500 index so far this year and is generating a positive performance in the "Uber Cannibals" portfolio.
Asbury, one of the largest automotive retail and service companies in the U.S., has reported profits and sales growth this year, as well as continuing its plans to repurchase substantial amounts of stock on the market. With a market cap of just $1.7 billion at the time of writing, the company repurchased $110 million of stock in 2018 and has repurchased around 300,000 shares so far this year.
Disclosure: The author owns no share mentioned.
Read more here:Â
Seth Klarman's 3-Step Approach to ValuationÂ
When Should You Hold More Cash?Â
Ackman: Berkshire Hathaway Has Plenty of Scope for GrowthÂ
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.
