If Warren Buffett could change his mind about investing in airlines, Mohnish Pabrai could change his mind about investing in autos.
Pabrai Investment Funds is coming off a tough couple of years as the partnership approaches the two-decade mark. GM’s stock has been roughly flat since Pabrai bought it five years ago, and a separate investment in a zinc manufacturer went to zero.
Pabrai said the experience has made him even more focused in finding companies today that “just gush cash without debt” – like Google parent Alphabet, which he purchased a few years back.
The partnership today has $535 million in assets under management, according to Pabrai, and has returned 14.8 percent annually after fees and expenses on average since it began in 1999.
With regard to his current portfolio, “I’ve always detested the automakers,” Pabrai told CNBC in the latest “Value Spark” interview. “You know, unionized, very high [capital investment], subject to consumer taste” that can change by the time cars get to market.
But GM and Chrysler emerged from bankruptcy last decade as “completely different companies,” Pabrai said. “And so Detroit went from being one of the worst places on the planet to build a car to one of the very best.”
Equally significant, Chrysler was incredibly inexpensive five years ago, around the time of Pabrai’s investment, trading at essentially just its earnings power with no growth multiple at all.
“Cheapness will let me get over some dislike,” he added with a chuckle.
Pabrai also supported efforts by Chrysler to unlock value by spinning off assets like Ferrari, which it did in a public offering in 2015.
While acknowledging he hasn’t “seen much of a return” in GM the past five years, Pabrai does not support current efforts by GM investor David Einhorn to unlock value by creating two separate classes of GM stock: one for the capital appreciation, and one for the dividend.
“I don’t think it’s a good idea,” Pabrai said. “So I’m actually with GM management on that,” adding he thinks GM chief executive Mary Barra “is fantastic.”
In fact, he said, “a better approach is [for GM to] eventually eliminate the dividends,” especially since the auto business is so cyclical.
GM instead could increase its pace of stock buybacks, which, “in any case are a better way to get money to shareholders because you don’t have Uncle Sam in the middle,” said Pabrai. He still thinks GM shares are worth 50 percent to 100 percent more than their current level of about $33.
He added that he thinks “we are never going to see oil over $60 [again] for any sustainable period of time,” thanks to the U.S. fracking revolution. That is key support for his investment in the gasoline-fueled automakers and for Southwest Airlines.
As for self-driving cars, Pabrai doesn’t see them as a disruptive threat to the auto industry.
“We will see self-driving [freight] trucks,” he said. But, “there isn’t going to be any self-driving cars as we think about it for at least a couple of decades,” said Pabrai.
—By CNBC’s Kelly Evans.
For more, including Pabrai’s views on President Trump, Jeff Bezos of Amazon, Alphabet’s prospects and on Buffett’s Berkshire Hathaway, please see the full interview at CNBC Pro.