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2019 Free Lunch Portfolio

12/19/2018

57 Comments

 
In December 2017, I co-authored an article in Forbes about The “Free Lunch” Portfolio, which combines the power of Uber Cannibals, Shameless Cloning and Spinoffs. As a recap, our algorithms selected these 15 companies for 2018:

Uber Cannibals
  • Lowe’s Companies (LOW)
  • NVR (NVR)
  • Sleep Number (SNBR)
  • The Hackett Group  (HCKT)
  • Willis Lease Finance (WLFC)
 
Shameless Cloning 
  • Alibaba Group Holding (BABA)
  • British American Tobacco (BTI)
  • Fiat Chrysler Automobiles (FCAU)
  • General Motors (GM)
  • Micron Technology (MU)
 
Spinoffs 
  • Adient (ADNT)
  • CSRA (CSRA)
  • GCP Applied Technologies (GCP)
  • Lamb Weston Holdings (LW)
  • Synchrony Financial (SYF)

The Free Lunch portfolio was down 17% in 2018, vs. -2.9% for the S&P 500. Our backtests show that the Free Lunch Portfolio outperforms the S&P 500 over a 17+ year period (17.1% annualized for the Free Lunch vs. 5.4% for the S&P 500), but it does not do so every year. In fact, the Free Lunch Portfolio underperformed in 6 out of the 17 years we tested.

Keep the faith and do not overreact to short-term negative performance. This is a long-term “set it and forget it” strategy. We don’t recommend putting more than 10-20% of your nest egg into this strategy. And we think it only makes sense if you follow it for a decade, or two, or longer. Ideally, you would use this strategy in your IRA, so you wouldn’t have to worry about realized gains.  

The New 2019 Free Lunch Portfolio

We are now ready to rebalance the Free Lunch Portfolio for 2019. Here are the constituents for the upcoming year:

Uber Cannibals
  • Corning Inc. (GLW)
  • PulteGroup (PHM)
  • Sleep Number (SNBR)
  • Discover Financial Services (DFS)
  • Lear Corp. (LEA)
 
Shameless Cloning 
  • Charter Communications (CHTR) – From TCI Fund Management
  • Citi Group (C) – From ValueAct Capital
  • Micron Technology (MU) – From Appaloosa Management
  • Alphabet (GOOGL) –  From Sequoia Fund
  • Berkshire Hathaway (BRK.B) – From Markel Insurance
 
Spinoffs 
  • Hamilton Beach Brands Holding (HBB)
  • DXC Technology (DXC)
  • Varex Imaging Corp. (VREX)
  • Hilton Grand Vacations (HGV)
  • Delphi Technologies (DLPH)

If you are a new investor to the Free Lunch Portfolio, you can just equal weight these 15 stocks (i.e., invest the same amount of money in each of these 15) in early January 2019.

If you invested in the Free Lunch Portfolio at the beginning of 2018 and rebalanced the Uber Cannibals in April 2018 when we published the New Uber Cannibals, then you would sell all of the 2018 Spinoffs and Shameless Cloning companies except for Micron, and invest the proceeds equally among the 9 new kids. You can do this in early January 2019 (or now if you’re investing in a taxable account and you’d like to capture losses for 2018).

As a reminder, the Uber Cannibals get published for rebalancing every April, while the Spinoffs and Shameless Cloning ideas rebalance in January. When we publish the new Uber Cannibals in April 2019, sell the Ubers that are no longer on the new list and invest the proceeds equally across the new Uber Cannibal picks. Then in January 2020, you’ll rebalance the Spinoffs and Shameless Cloning ideas.

Enjoy!

Note, anyone who invests in any strategy needs to do their own research/due diligence and are themselves fully responsible for the outcome.
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57 Comments
Anabil Dhar
12/19/2018 06:28:54 pm

Sir free please provide something similar for Indian markets too..Thank you.

Reply
T Angchuk
1/23/2019 05:50:16 am

FYI
https://twitter.com/MohnishPabrai/status/1082862606405197824?s=20

Reply
Ankit Agarwal link
1/23/2019 05:53:26 am

If you have any suggestions, pls feel free to share. Generally all recommendation should come with a disclaimer. INvesting is a risky business and a lot of time stock moves downward after recommendation by a celebrity investor.

Reply
Arvind Bandivadekar
12/19/2018 06:39:02 pm

Any indian counterpart of Corning?

Reply
Shashank Bhatt
12/19/2018 07:06:10 pm

Bang on with research and analysis part Mohnish, keen for your article for Indian market too

Reply
Kamal Garg
12/20/2018 01:07:53 am

We would appreciate if such work is done for Indian companies and markets.

Reply
Chiteshwar Walia
12/21/2018 05:50:28 am

Kindly do some work on Indian markets

Reply
Nero Nguyen link
12/21/2018 07:03:21 am

Interesting picks Pabrai. I'm also interested to see where this portfolio ends up heading over the next few years. This year has been pretty bad so far for the markets but just means it's a good time to buy.

Reply
Nagesh link
12/21/2018 09:43:09 am

Sir, please provide similar picks for India..

Reply
Namzlot
12/21/2018 11:13:40 am

What is it that you dont recommend putting in more then 10-20% of your investable nest egg in to this strategy?

Thnaks!

Reply
Bruce Bohannon
12/21/2018 11:23:10 am

Thank You! Love your works and passions. Very grateful that we can look at some of the same Businesses' you are entertained by.

Reply
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12/22/2018 02:18:29 pm

Thanks Mohnish. Great write as always.

Reply
Eswaran link
12/22/2018 04:23:24 pm

Thanks Mohnish
Just read your book again!
Always worthwhile dusting it out for some "pearls" at a time like this!

Reply
Brad
12/22/2018 08:14:30 pm

How do you determine which shameless clones get selected?

Reply
vinit
12/26/2018 05:24:41 am

mr. pabrai can we count just dail under uber canibals

Reply
Michael link
12/28/2018 12:06:57 pm

Mohnish! When did you make the jump from fundamental analysis of a situation to back testing securities prices as basis for a conclusion? If the business is poor, any amount of cannibal-ling is not going to help continuing holders. See, IBM, etc.! The methodology you described doesn't appear to separate 'good' from 'bad' businesses. It *might* still work, but I don't think we've answered the question "why" it should work.

Reply
Davide
12/30/2018 07:12:56 am

Dear Mohnish,
it seems the Forbes article you have mentioned was published on December 22, 2016, not in 2017.
Thank you for sharing the uber cannibals with us.
I wish you a wonderful new year from Italy,
Davide

Reply
Dhruv
1/4/2019 10:55:58 pm

Dear Mohnish,
Rain industries has fallen from 450 levels to 130 . Any clue about it’s future? One should hold or exit?

Reply
Amado
1/7/2019 01:59:18 pm

Why publish Uber Cannibals now if a new lot will be given in April 2019?

Me no understand.

Reply
amar sawhney
1/8/2019 03:21:30 am

i am not impressed-no original thoughts
just buy brkb and mkl

Reply
C.F. Fung
1/8/2019 11:28:27 pm

I don't understand the consecutive years of picking Micron. Super high cycle, bound to turn south (actually it's already been). Samsung, SK Hynix and Micron all invested heavily in capex in 2017-2018, signs of glut is apparent. 3x P/E may just turn 10x in few quarters. I know it's shameless cloning, but did your team do any work on it at all?

Reply
Ankit Agarwal link
1/23/2019 05:55:10 am

Its very easy to question the work done by the analyst. Also its very difficult to list every parameter in a short blog post.

Reply
Guillermo Muniz
4/27/2019 04:34:12 am

Micron has $10Bil approved for shared buy back in 2019. that is 20% value of current shares outstanding at $40 per share. If they were to spend that money today you would get a 20% increase in value. If the stock is set go lower in price, the buyback would be way more valuable to the investors. The company is aggressively reducing their debt and positioning themselves to survive the storm. With such low PE and the buyback protecting value, this stock over the years has a low risk high reward scenario.

Reply
Ankit link
1/14/2019 02:22:40 am

What is the reco.mended holding period fkr the above stocks? Are these buy and forget companies?

Reply
Ankit link
1/14/2019 02:25:00 am

Also are there any recommendations for indian companies?

Reply
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JIm
2/6/2019 05:58:51 pm

This stinks of curve fitting. It will be a miracle if it even keeps up with the S&P 500 going forward. It lost by a mile in 2018 setting it up for a huge hole to dig out from.

Reply
Shorto
2/7/2019 03:17:50 pm

This is so short on logic

Reply
Raj
2/18/2019 09:08:23 pm

The question is, how much of your money have you invested in these companies?

Reply
Ruzaini link
2/20/2019 07:18:44 pm

Hi Monish,

Given BABA's asset-light business model, does BABA have an edge over AMZN in terms of expansion into new markets?

Considering BABA's dominant position in China's ecommerce industry and consumer consumption growth in China, do you think BABA is relatively undervalued to AMZN?

Reply
Ocean Of Games Web link
3/12/2019 08:48:21 am

The question is, how much of your money have you invested in these companies?

Reply
augifm
3/20/2019 12:59:31 pm

I know this portfolio is suggested to be used in a nontaxable account. But seems terrible in a taxable account. If this is already obvious to others I apologize ahead of time for my ignorance.

Assuming that every year is a linear 17% return. wouldn't the annual 15% long term capital gain eat up all/the majority of profit?

Example starting w/ $1

year.....
1. $1.17
-15%
----------
$0.96 +(17% of $.96) = year 2

2. $1.12 (5%cagr)
-15%
---------
$0.95

3. $1.11 (3.5%cagr)
-15%
--------
$0.94

4. $1.10 (2.5%cagr)
-15%
---------
$0.94

This reinforces Buffett's preferred holding period of forever.....I've always known this, but it didn't hit me in the head with a 2x4 until I did these calculations.

Reply
Chris G.
7/24/2019 07:21:39 am

To augifm:

The capital gain tax is not applied to the principal amount invested, only the gain portion (and only when the stock is sold).

year.....
1. $1.17
-15% (of .17 only, not of $1.17 like you used)
----------
$1.1445 +(17% of $1.1445) = year 2

2. $1.1945...

Reply
augifm
4/13/2019 01:55:33 pm

Please ignore previous calculations as I was taxing the entire investment amount instead of solely the profit(capital gains)

Reply
Trajan
4/29/2019 01:33:11 pm

Dear Mohnish,

i'm very interested in the 5 spinoffs, while i'm watching these strategy for a while. That's why i'm interested, which criteria did you choose here?
Combination of time since spinoff, management change since spinoff and (un-)attractivness for investors like Greenblatt did?
Thanks and best wishes!

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    Mohnish Pabrai

    Mohnish Pabrai is the founder and Managing Partner of the
    Pabrai Investments Funds, the founder and CEO of
    Dhandho Funds, and the author of The Dhandho Investor and Mosaic. 

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