The New 2017–2018 Uber Cannibals

Pay close attention to the cannibals – the businesses that are eating themselves by buying back their stock.   - Charlie Munger​

I co-wrote an article with quant analyst Yingzhuo Zhao that ran in Forbes.com (December 22, 2016), entitled “Move Over Small Dogs of The Dow, Here Come The Uber Cannibals.” In it, we discussed the “Uber Cannibals” five stock portfolio, which selects five Uber Cannibal stocks in March/April of every year. We are now ready for the March/April 2017 picks.

As a recap, our algorithms selected these five cannibals for 2016-2017:​

• AutoZone (AZO)
• Magellan Health (MGLN)
• Lowe’s Companies (LOW)
• NVR (NVR)
• Marriott International (MAR)

 
To keep it simple, I’m assuming that folks bought these stocks at the beginning of 2017. Thus, the Uber Cannibals track record starts from 1/3/2017. Let’s assume that on 1/3/2017, an investor, Ms. Sonia Patel, invested $100,000 from her IRA account at Interactive Brokers in the Uber Cannibals strategy, and equally weighted the five stocks. Her portfolio would have looked like the portfolio in the table below assuming that she bought all stocks at the highest prices they traded at that day (we ain’t givin’ Sonia no breaks!). She would have paid $5.90 in commissions assuming she’s chosen the “Fixed Pricing Structure” at Interactive Brokers. 
​

# of shares	1/3/17 Qty
AutoZone	25
Magellan Health	262
Lowe's	279
NVR	12
Marriott Int’l	238
Cash	$0.17

 

​Lowe’s and Marriott paid dividends totaling to about $169 in Q1 2017. Per our rules, Sonia reinvested these dividends back into the same businesses. The performance of the Uber Cannibals strategy compared with the Small Dogs of the Dow and the S&P 500 is shown below.
​

Q1 2017
	Performance	Value of the original $100K
The Uber Cannibals	7.0%	$106,979
S&P 500	6.1%	$106,066
Small Dogs of the Dow	4.7%	$104,692

 

​There is not much to say about the above numbers. Three months is too short a period to draw any conclusions, but we are doing well so far. As a reminder, in our backtests, between 1992 and 2016, the strategy returned an annualized 15.5% versus the S&P 500’s annualized return of 9.2%.
​
The Uber Cannibals have a quirk. We use year-end financials to pick the next set of Ubers for the coming years. And those aren’t available till late-March from our data providers. So, if one follows the Uber Cannibals strategy, one needs to tweak the portfolio annually during early April.

The New Kids on the Block

For the 2017-2018 period, our algorithms selected the following five Uber Cannibals:

1. Lowe’s (LOW)
2. NVR (NVR)
3. The Hackett Group (HCKT)
4. Select Comfort (SCSS)
5. Willis Lease Finance (WLFC)

Two of the original Uber Cannibals, Lowe’s and NVR will continue to be in Sonia’s portfolio for another year. And we have three new kids on the block.

The Forbes article discussed how NVR had bought back 75% of shares outstanding in the last two decades. Lowe’s is following in NVR and AutoZone’s footprints. Over the last thirteen years, Lowe’s has reduced its share count by a stunning 45%. Lowe’s share count has dropped by 30% in just the last five years. Like Home Depot, Lowe’s has an entrenched position in the home improvement superstore category. Not a business that’s easy for Amazon to disrupt. As home building gets back to historical norms of over a million new homes being built every year, Lowe’s has natural tailwinds as far out as the eye can see.

If you are a new investor to the Uber Cannibals, you can just equal weight these five stocks (i.e., invest the same amount of money in each of these five) and keep that portfolio until April 2018, when I’ll provide the 2018-19 portfolio on www.ChaiWithPabrai.com. If you invested in the Uber Cannibals at the beginning of the year like Sonia, then you would leave Lowe’s and NVR untouched, sell the other three and invest the proceeds equally among the three new kids. Then just set it and forget it for another year.​ Happy Cannibal Investing!