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2019 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. 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.

This article was originally published on Mohnish Pabrai’s blog Chai with Pabrai.
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