Mohnish Pabrai published another iteration of his Cannibal Portfolio. The Cannibals are a number of stocks selected by an algorithm that are eating themselves, aka buying back their own stock. It is a bit of a misnomer, I believe introduced by Charlie Munger, seeing as eating yourself would be “autocannibalism” or “autosarcophagy.” But who cares as long as it makes money!
Academics back up that notion, as per Uekoeter and Evgeniou 2015:
A portfolio of the first type of companies, in which we hold stocks for one month after buyback announcement, shows annual “abnormal” returns relative to the IWM market index of 16.3%
First, let’s see how this strategy did last year. There were five:
Lowes (NYSE:LOW) NVR (NYSE:NVR) The Hackett Group (NASDAQ:HCKT) Select Comfort (SCSS) Willis Lease Finance (NASDAQ:WLFC)
I compared their performance from the date of my previous write-up highlighting Pabrai’s strategy to today:
LOW Total Return Price data by YCharts
They killed it.
Just so you know how much attention you should pay to my opinion as to which one to buy, last year I said:
Some of the points made by Nicolas Carreras would have me think twice before loading up on this one:
Sleep Number, formerly known as Select Comfort, ended up returning 42.71% over 2017.
I also said:
Gun to my head, I’d go with The Hackett Group today.
The Hackett Group went -15.4% for the worst performance in the entire group. The only selection that actually lost money.
This year’s top five:
Sleep Number Corp. (NASDAQ:SNBR) Corning Inc. (NYSE:GLW) PulteGroup (NYSE:PHM) Discover Financial Services (NYSE:DFS) Lear Corp. (NYSE:LEA)
No matter the brutal performance of the picks I liked best last year, I’ve again put together two tables with interesting data points on the 2018 Uber Cannibals:
|
Company Name |
Symbol |
Num of Analyst Following |
EV-to-EBIT |
PE Ratio |
PB Ratio |
EV-to-Revenue |
Earnings Yield % |
Price-to-Free-Cash-Flow |
|
Lear Corp |
LEA |
6 |
8.1 |
10.03 |
3.04 |
0.63 |
10.17 |
10.84 |
|
Discover Financial Services |
DFS |
9 |
11.03 |
13.27 |
2.49 |
3.94 |
7.54 |
5.35 |
|
PulteGroup Inc |
PHM |
6 |
15.56 |
20.48 |
2.04 |
1.71 |
4.88 |
13.99 |
|
Corning Inc |
GLW |
5 |
14.82 |
0 |
1.79 |
2.66 |
-2.55 |
114.73 |
|
Sleep Number Corp |
SNBR |
1 |
14.91 |
22.66 |
15.28 |
0.96 |
4.6 |
13.42 |
Four out of five companies are followed by a fair number of analysts. I’m most interested in companies with little or no coverage. On all the EV/x, the PE ratio and the PB ratio the companies don’t appear to be exciting investments. However on a price to free cash flow basis Discover Financial Services looks super interesting and Lear Corp looks compelling as well.
| Company Name | Symbol | Debt-to-EBITDA | Debt-to-Asset | Tax Rate % | 10-Year Book Growth Rate | 10-Year FCF Growth Rate |
Dividend Yield % (10y High) |
| Lear Corp | LEA | 0.96 | 0.16 | 12.94 | 29.1 | 0 | 1.46 |
| Discover Financial Services | DFS | 6.7 | 0.26 | 40.66 | 10.9 | 6.8 | 4.85 |
| PulteGroup Inc | PHM | 6.52 | 0.67 | 52.36 | 4.1 | 0 | 2.25 |
| Corning Inc | GLW | 1.73 | 0.19 | 129.99 | 8.5 | 7.3 | 2.85 |
| Sleep Number Corp | SNBR | 0.16 | 0.05 | 28.52 | 0 | 0 | D0 |
On a debt-to-ebitda basis Discover and PulteGroup look scary. Discover at least has a more reasonable debt to asset ratio which is reassuring. On tax rates all are compelling except Lear. You would think there’s room for improvement here. Lear, Discover and Corning all have interesting 10-year book value growth rates. Just Discover and Corning have interesting FCF growth rates.
I like this year’s group better. I like PulteGroup least and I like all four of the others a lot. If forced to pick a favorite I’d go with Discover Financial Services.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
