Bill Ackman (Trades, Portfolio)'s career has been a rollercoaster over the last several years. Over the course of half a decade, he went from being one of the most well-regarded hedge fund managers in the industry to having a string of well-publicized failures as a result of shorting Herbalife HLF and betting on Valeant. Since then, his fortunes have turned around - in the first quarter of 2020, he made huge returns via a credit default swap position, profiting when the market collapsed back in April.
In his latest letter to investors of his Pershing Square Capital, Ackman acknowledged the obvious problems caused by the ongoing global viral outbreak. However, he was extremely upbeat about his portfolio's prospects going forward.
The stock market is not the economy
Ackman believes the disconnect between the performance of the stock market and the underlying economy is not a strange coincidence - it's a feature of the system. In his understanding, the stock market is comprised of the biggest and best-capitalized companies in the country, so any predictions that you make on the basis of economy wide data might not be very useful. For instance, even if unemployment were to rise, that might not mean too much for the earnings of a company like Facebook FB.
Lowe's
Ackman's position in home improvement retailer Lowe's LOW has paid off well this year - between Jan. 1 and Aug. 25, the stock has gained 37%. Why such an increase? To Ackman's previous point, Lowe's is one of those businesses that has actually benefited from the problems of the last few months - during lockdown, many Americans turned to home improvement (either from boredom or from the sudden abundance of free time). And unlike some of the companies that have been bid up recently, Lowe's has the fundamentals to back up its share price surge - sales, operating margin and earnings have all increased at a healthy clip.
Moreover, it is cheaply priced relatively to rival Home Depot HD - Lowe's is currently trading at 19 times Pershing Square's 12-month estimate of its earnings, whereas Home Depot carries a 25 multiple. Of course, it's not like the business environment has fundamentally changed for Lowe's - demand for home improvement is not likely to remain at its current elevated levels, so today might not be the best time to initial a position in the stock.
Disclosure: The author owns no stocks mentioned.
Read more here:
- The Value Investor's Handbook: Understanding the Dividend Discount Model
- Charlie Munger Isn't Big on Diversification
- John Neff's Investment Philosophy
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