2020 Free Lunch Portfolio

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. An updated portfolio was published on the blog in December 2018. As a recap, our algorithms selected these 15 companies for 2019:

Uber Cannibals

• Corning (GLW)
• Discover Financial Services (DFS)
• Lear (LEA)
• PulteGroup (PHM)
• Sleep Number (SNBR)

 
Shameless Cloning 

• Alphabet (GOOGL), from Sequoia Fund
• Berkshire Hathaway (BRK.B), from Markel Insurance
• Charter Communications (CHTR), from TCI Fund Management
• Citigroup (C), from ValueAct Capital
• Micron Technology (MU), from Appaloosa Management 

 
Spinoffs 

• Delphi Technologies (DLPH)
• DXC Technology (DXC)
• Hamilton Beach Brands Holding (HBB)
• Hilton Grand Vacations (HGV)
• Varex Imaging (VREX)

The Free Lunch portfolio was up 21.7% in 2019, vs. 31.2% for the S&P 500. Since inception on January 1, 2018, on an annualized basis, the Free Lunch portfolio is up 0.01% while the S&P is up 12.0%.  
 
The Free Lunch is only 2 years old, so we can't draw any meaningful conclusions about its long-term performance yet. These are early days. Keep the faith. 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 2020 Free Lunch Portfolio

We are now ready to rebalance the Free Lunch Portfolio for 2020. We made a few changes to the Shameless Cloning and Spinoffs strategies that we believe can select better companies and improve future performance. The changes are summarized below:
 
Shameless Cloning:

• We replaced Greenlight Capital with Pershing Square Capital Management on the list of managers whom we shamelessly clone.

Spinoffs:

• We tightened the Price/ Sales Ratio entry condition from a P/S of less than 3 to a P/S of less than 2.

 

• We changed the credit rating requirement so that now both the parent company and its spinoff must meet the minimum credit rating threshold at the spinoff’s entry into the portfolio. If the spinoff experiences any credit rating downgrade since IPO, it is removed.

 

• We added a new quality condition and now select the top 5 spinoffs with the highest trailing 12-month return on invested capital (ROIC). 

Here are the constituents for the upcoming year:

Uber Cannibals

• Allison Transmission Holdings (ALSN)
• Asbury Automotive Group (ABG)
• Corning (GLW)
• Quanta Services (PWR)
• Sleep Number (SNBR)

 
Shameless Cloning 

• Alphabet (GOOGL), from Sequoia Fund
• Berkshire Hathaway (BRK.B), from Markel Insurance
• Chipotle Mexican Grill (CMG), from Pershing Square  
• Citigroup (C), from ValueAct Capital
• Fiat Chrysler Automobiles (FCAU), from Pabrai Funds 

 
Spinoffs 

• Athene Holding (ATH)
• FirstService (FSV)
• Hilton Grand Vacations (HGV)
• RMR Group (RMR)
• Vectrus (VEC)

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 2020.

If you are already invested in the Free Lunch Portfolio, and you rebalanced the Uber Cannibals in April 2019 with the New Uber Cannibals, then sell all of the 2019 Spinoffs and Shamelessly Cloned businesses except Alphabet, Berkshire Hathaway, Citigroup and Hilton Grand Vacations, and invest the proceeds equally among the 6 new kids. You can do this in early January 2020.
 
If you're investing in a taxable account, you may try to sell the losers (Hamilton Beach Brands Holding, DXC Technology and Delphi Technologies) in December 2019 to capture short-term losses and sell the winners (Charter Communications, Micron Technology and Varex Imaging) in early January 2020 to capture long-term gains.
 
These are the stocks to sell, along with their full-year 2019 returns: 

Bucket	Stock	2019 Return
Shameless Cloning	Charter Communications	75%
Shameless Cloning	Micron Technology	69%
Spinoffs	Varex Imaging	27%
Spinoffs	Delphi Technologies	-7%
Spinoffs	Hamilton Beach Brands Holding	-19%
Spinoffs	DXC Technology	-28%

 

As a reminder, the new Uber Cannibals get published every April, while new the Spinoffs and Shameless Cloning businesses are released in January. When we publish the new Uber Cannibals in April 2020, 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 2021, 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.