Activist investor Bill Ackman (Trades, Portfolio)âs Pershing Square Capital Management recently released its portfolio update for the fourth quarter of 2019.
Founded by Ackman in 2004, Pershing Square focuses on taking large stakes in a small number of well-researched companies that it deems to be fundamentally strong but underperforming in the short term. After obtaining a large enough position of influence as a major shareholder, preferably enough to get board representation, the hedge fund then aims to catalyze improvements in the target companyâs strategy in order to further increase its expected profitability.
As of the quarterâs end, the equity portfolio was valued at $6.55 billion and consisted of the following eight stocks: Chipotle Mexican Grill Inc. CMG (22.03%), Hilton Worldwide Holdings Inc. HLT (17.87%), Lowe's Companies Inc. LOW (15.74%), Restaurant Brands International Inc. QSR (14.68%), Berkshire Hathaway Inc. BRK.B, Starbucks Corp. SBUX(7.32%), Howard Hughes HHC (4.25%) and Agilent A (4.23%).
Pershing Square reduced its position in Starbucks during the fourth quarter and added to its holdings in Howard Hughes and Agilent Technologies.
Starbucks
Pershing Square sold 3,855,936 shares, or 41.4%, of its Starbucks stake, reducing the number of shares owned to 5,457,954. The trade had a -5.25% impact on the equity portfolio. The stock traded at an average price of $85.31 during the quarter.
The iconic cafĂŠ chain was founded in Seattle in 1971. Since then, it has become one of the most well-known chains in the U.S., with one or two stores in nearly every major urban and suburban neighborhood in the country.
On Feb. 18, shares of Starbucks traded around $88.63 for a market cap of $104.19 billion and a price-earnings ratio of 29.01. The company has a GuruFocus financial strength rating of 4 out of 10 and a profitability rating of 9 out of 10.
Over the past three years, revenue has grown an average of 14.5% per year, while Ebitda has grown an average of 12.3% per year. Net income was down to $3.6 billion in 2019 compared to $4.5 billion in 2018.
The companyâs strong growth has seen its share price move into the overvalued range, according to the Peter Lynch chart.
âSBUX should continue to generate robust earnings growth through one of the worldâs most dominant, attractive and profitable brands,â reads Pershing Squareâs annual investor presentation for 2019. However, âreturns became more modest following a total shareholder return of 73% in the 19 months that we owned Starbucks.â In other words, the hedge fund reduced the position not because of lack of confidence in the companyâs fundamentals, but because it no longer expects it to maintain the current level of growth, which would reduce returns for shareholders.
Howard Hughes
The guru increased the stake in Howard Hughes by 1,002,596 shares, or 83.91%, bringing the total number of shares owned up to 2,197,389 and impacting the equity portfolio by 1.94%. During the quarter, the stock traded at an average price of $116.27.
Howard Hughes is a Texas-based real estate development and management company that has its origins in the oil drilling tool business in Dallas. Soon after its founding, the company diversified into real estate, which now accounts for the majority of operations.
On Feb. 18, Howard Hughes shares traded around $125.11 for a market cap of $5.41 billion and a price-earnings ratio of 48.19. The company has a GuruFocus financial strength rating of 4 out of 10 and a profitability rating of 6 out of 10. The return on capital of 484.72% and three-year revenue growth rate of 9.7% are outperforming 61.67% of competitors.
In October of 2019, Howard Hughes completed a comprehensive review of its assets and decided to enact a transformation plan. It aims to sell approximately $2 billion in non-core assets and cut costs by $50 million. Effective as of the announcement, Paul Layne will be the new CEO, and both David Weinreb (former CEO) and Grant Herlitz (former company president) stepped down from the company.
Ackman attributes the hurting share price of Howard Hughes to misunderstandings about the way the company operates. The new leadership and transformation plan thus hold high potential to drive up both company profitability and shareholder value. Below is an excerpt from his 2019 semiannual letter to shareholders regarding the matter:
âIn addition to residential land sales, HHC has a significant, under-appreciated profit opportunity in the commercial development of its MPCs [master planned communities]. As MPCs reach a tipping point of residential density, demand arises for retail, office, multi-family and hospitality development in HHC-owned MPC town centers. Over time, the stable and recurring real estate cash flows (net operating income or NOI) from these properties will represent a growing percentage of HHCâs value.â
Agilent Technologies
Pershing Square also added 332,011 shares, or 11.39%, to the position in Agilent Technologies, bringing the number of shares owned up to 3,248,114. The trade had a 0.43% impact on the equity portfolio. Shares traded at an average price of $78.92 during the quarter.
Agilent researches, develops and manufactures analytical laboratory instruments that identify, quantify and analyze the molecular properties of substances. These instruments are crucial to the quality control testing of food and drugs and can also be used to detect environmental contaminants.
On Feb. 18, shares of the company traded around $85.82 for a market cap of $26.67 billion and a price-earnings ratio of 25.54. GuruFocus has assigned the company a financial strength score of 6 out of 10 and a profitability score of 8 out of 10.
Although the companyâs revenue has declined since 2012, it has been increasing in recent years, along with net income. The operating margin of 18.84% is outperforming 87.75% of industry competitors.
According to Pershing Squareâs 2019 annual investor presentation, Agilent has an âattractive ârazor bladeâ business model, where instrument sales drive recurring consumables and services revenue.â
âWe were able to opportunistically accumulate our position in Agilent at an attractive valuation, an average cost of $76.58 per share, due to share price underperformance caused by a temporary slowdown in instrument sales that has already shown early signs of recovery,â the firm noted.
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research and/or consult registered investment advisors before taking action in the stock market.
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