Warren Buffett is one of the top investors in the world and many might rightfully argue that he is the best investor in the world. Therefore, because of his success, it’s not surprising that he is one of the most studied and emulated investors alive and many people around the globe are trying to copy his investment style, strategies, and even his stock picks. However, because Buffett invests a lot of money in a diversified portfolio of stocks, there aren’t many investors that can allocate the same capital to own Buffett’s holdings, even in much smaller fractions. Moreover, because many of Buffett’s positions have been held over a long period of time, the attractiveness of many of his sock picks is gone.
Luckily, there are other great investors who copy Buffett’s style and provide us with plenty of opportunities to mimic their stock picks. One of them is Mohnish Pabrai, who is using the same value investing style that Buffett does and even paid $650,100 for a lunch with Buffett. Pabrai doesn’t hide the fact that he is copying Buffett, although his funds didn’t have a lot of downside protection as was evidenced in 2008, when they lost 60%. Nevertheless, in a bull market, Pabrai is making a lot of money and he has said that he is using a checklist to avoid past mistakes. In 2009 his funds returned 120% and a similar performance has extended to the present.
At Insider Monkey, we assess a fund’s performance using only the stocks it discloses in quarterly 13F filings with the Securities and Exchange Commission and focus on companies with market caps above $1.0 billion. This allows us to identify the best stocks to emulate under our small-cap strategy, which uses a proprietary methodology to identify the best small-cap stocks (with market value between $1.0 and $5.0 billion) that the best-performing investors are collectively bullish on. This approach has helped us beat the market by around 20 percentage points since the strategy was launched in May 2014 (see more details here). We share the stocks from our strategy in quarterly newsletters and we also have a monthly activist newsletter that analyzes one activist fund each month and identifies the best ways to imitate that fund.
Pabrai’s Dalal Street fund is relatively small, with an equity portfolio of $385.83 million and only five positions as disclosed in the latest 13F filing. During the first three quarters of 2017, Pabrai’s stock picks posted a weighted average return of 43%, while over the 12-month period ended September 2017, the holdings returned 94.9%. Let’s take a look at the five stocks in Dalal Street’s 13F portfolio.
Fiat Chrysler Automobiles NV (NYSE:FCAU) is by far the largest holding in Dalal Street’s equity portfolio. At the end of December, the fund held 13.11 million shares of the company worth $233.87 million, which represents over 60% of the total equity portfolio value. The fund significantly benefitted from Fiat Chrysler Automobiles NV (NYSE:FCAU)’s stock 95% growth in 2017. By comparison, General Motors Company (NYSE:GM)’s stock gained 16% and Ford Motor Company (NYSE:F)’s share price inched up by 4%. Fiat Chrysler Automobiles NV (NYSE:FCAU) has been focusing on its margins and profitability lately, while at the same time investing heavily in reviving its Alfa Romeo brand and expanding Maserati brand, as well as expanding the Jeep brand internationally. Moreover, last year was marked by speculations that Fiat Chrysler might break itself up or that Chinese automaker Great Wall Motor Co and South Korea’s Hyndai Motor Co might be interested in pursuing acquisitions. However, the company has put these rumors to rest recently.
At the Detroit Auto Show in January, Fiat Chrysler’s CEO Sergio Marchionne said that the company has no plans to break up or to sell individual brands to China and is expecting its Jeep brand to double its net profit. Marchionne also said that he had recommended the spin off of Magneti Marelly, a maker of components for lighting, engines, electronics, suspension and exhausts by the end of this year, and confirmed the targets for 2018, which include erasing all debt and adding up to $6 billion in net cash.
In addition, it is considered that Fiat Chrysler Automobiles NV (NYSE:FCAU) stands to benefit the most if the Trump administration relaxes the fuel-economy rules set in place by the former administration, the main reason being that it is not as committed as GM and Ford on developing electric vehicles.
On the second spot in Dalal Street’s portfolio is Alphabet Inc (NASDAQ:GOOG), in which the fund owns 45,828 shares, down by 30% over the quarter, worth $47.95 million. Alphabet Inc (NASDAQ:GOOG) is another winner in Pabrai’s portfolio, as the stock gained 35.60% in 2017, helped by better-than-expected EPS and revenue figures posted for the first three quarters and quarterly revenue growth above 20% year-on-year. Alphabet Inc (NASDAQ:GOOG) offers investors the opportunity to invest in a very financially-sound company, with a leading position in its core business, but it also allows investors to benefit from the future potential of its Other Bets division that includes Nest, Google Fiber, venture capital investments and the X division that develops breakthrough technology like self-driving cars.
In AerCap Holdings N.V. (NYSE:AER), Pabrai’s fund amassed a $42.49 million stake that contains 807,721 shares, down by 22% on the year. The stock of the aircraft leasing company appreciated by 26.40% during 2017 amid strong financial results. AerCap Holdings N.V. (NYSE:AER) also has a strong buyback program, under which it has repurchased 30% of its shares since 2015 and to which it has recently added $200 million expected to be used by June 2018. The company sees good demand for aircraft and expects the growth trend to continue this year.
Dalal Street also owns 398,138 shares of Ferrari N.V. (NYSE:RACE) worth $41.81 million. The fund has held shares of Ferrari N.V. (NYSE:RACE) since it was spun off from Fiat Chrysler and went public in January 2016 and saw the stock surge by over 200% since the IPO. In 2017, Ferrari N.V. (NYSE:RACE) reached 1.0 billion ($1.24 billion) in adjusted EBITDA two years ahead of the IPO plan. The company is targeting 2.0 billion euro in adjusted EBITDA and 1.2 billion euro in industrial free cash flow by 2022.
Southwest Airlines Co (NYSE:LUV) is the last holding in Dalal Street’s equity portfolio and is also the most recently added, in a manner of speaking; it initiated a stake in the company during the third quarter of 2016. Heading into 2018, Dalal Street held 300,975 shares worth $12.70 million. The stock of the US airline operator has appreciated by 30% last year, but it has declined by nearly 11% since the beginning of 2018 despite the company reporting a solid fourth quarter and posting a record load factor for January. Southwest Airlines Co (NYSE:LUV) posted EPS of $0.77, in line with estimates, while revenue of $5.27 billion beat the consensus estimate by $20 million, capping the 45th straight year of profitability. In 2018, Southwest Airlines Co (NYSE:LUV) expects to further expand its margins and continue fleet modernization.