25 Quality Cannibals
Some buybacks make you rich. Others burn billions. Here’s how to tell the difference
We've talked about Cannibal Stocks before - the businesses that relentlessly buy back their own stock. The pie gets smaller, but your slice gets bigger.
For smart investors, this is an irresistible deal: the same great business, the same profits, but more value per share.
If you love watching your wealth quietly compound, these companies can be great long-term bets
But… are buybacks always a good idea?
Take IBM. Mohnish Pabrai points the company out as an example of buybacks gone wrong.
From 2009 to 2019, they steadily repurchased their own shares. Yet, the stock price stayed flat.
Even Warren Buffett bought in between 2011 and 2017 - and lost money.
What went wrong?
Look at the revenue and net income, and it becomes painfully clear.
A Cannibal Stock only works if the underlying business is stable or growing. Buybacks won’t save a company in decline.
The Uber Cannibal Investing Framework
Mohnish Pabrai developed an ‘Uber Cannibal Investing Framework’.
Here are the core principles:
Earnings must be stable or growing for at least 20 years
Cyclical businesses? Fine - as long as they don’t get wiped out in downturns
It all comes down to three things: earnings growth, valuation, and the number of shares repurchased
After 20 years, only four things matter:
How many shares have actually been retired?
What was the average earnings and growth rate?
Is the business still strong?
What valuation is the market assigning to it?
And the most important rule: never invest in Cannibals with an uncertain future.
Remember IBM.
Cannibals and Quality Investing
If this sounds familiar, it’s no coincidence.
The best Cannibal Stocks fit perfectly into the Quality Investing framework.
Quality companies have the following characteristics:
A wide moat
Management with high integrity
Low capital intensity
Good capital allocation
High profitability
Attractive historical growth
A secular trend / optimistic outlook
These are the businesses we want - in both the Compounding Quality and Compounding Dividends Portfolios.
Quality + buybacks = serious wealth creation.
Here’s a list of 25 Quality Cannibals directly from Pieter:
Let’s give you a spreadsheet with the important details and dive into a few of the most interesting: