Bill Ackman (Trades, Portfolio) made headlines back in March as the legendary investor revealed a short position against the broad market, much to the surprise of the investing public.
It's no secret that this bet paid off handsomely, netting the guru over $2 billion. A few weeks later, Ackman decided to bet on many large U.S. companies, including Starbucks Corporation (SBUX, Financial) and Restaurant Brands International (QSR, Financial). The market bottomed on March 23, and the guru's call proved to be accurate once again.
After an eight month period of silence, Ackman is back again with an unpopular investment decision. Speaking for attendees at the Financial Times' Dealmakers conference on Nov. 10, the guru revealed paying premiums for credit default swaps on corporate debt indexes, which is the same transaction he executed in March to profit from an eventual collapse of capital markets. Specifically, he said:
"I hope we lose money on this next hedge. We are in a treacherous time generally and what's fascinating is the same bet we put on 8 months ago is available on the same terms as if there had never been a fire and on the probability that the world is going to be fine."
Details of this new deal emerged only after markets popped into new highs following the promising announcement from Pfizer Inc. (PFE) regarding the efficacy data of his vaccine candidate BNT162b2. It seemed as if the world will soon be back to its normal state, but the guru does not seem to agree with this thesis. A careful evaluation of the market valuation level and prospects reveal that investors need to be cautious in the coming months, but I think there is no reason to panic.
The bet represents expected troubles in the short term
Investors should reach investment decisions based on the long-term outlook for the economy. Despite being a renowned growth investor with a focus on the long run, Ackman is explicitly focusing on the near term with his latest hedging activity. On Nov. 10, the guru suggested that the economy would see a "robust recovery" following a vaccine to fight the pandemic, but the next few months would turn out to be difficult for many U.S. companies, in which case Ackman's Pershing Square Holdings. Ltd. (PSHFZ) will benefit from the bet against the market. Arguably, a retail investor's return expectations, risk tolerance and the investment time horizon are considerably different from that of Pershing Square, which needs to be factored into the analysis before jumping to any conclusion.
Not too late to cherry-pick
In an article published on Oct. 23, I reasoned out why I think Mario Gabelli (Trades, Portfolio) is bullish on a few beaten-down sectors such as airlines and cruise operators. Many investors, however, might have found it difficult to believe that any of these sectors would stage a major comeback in the foreseeable future.
For instance, when Pfizer's announcement reached the market on Nov. 9, investors quickly thrashed e-commerce and other stay-at-home stocks such as Zoom Video Communications Inc. (ZM) and reallocated funds into once unpopular sectors that are likely to be the big winners of the return to normalcy. While the tech sector and other growth stocks reeled from losses following the breakthrough announcement on Monday, many retailers, oil giants, airlines and cruise companies posted double-digit gains as the outlook for these sectors improved dramatically with the expectation for successful development of a vaccine to alleviate the concerns facing these businesses.
Despite the sudden change in investor sentiment that saw a few stocks skyrocket this week, the majority of the leading names representing troubled business sectors continue to trade at a significant discount to the stock prices seen at the beginning of this year. Below are some of the industry leaders that are still struggling to recover meaningfully.
| Company | Year-to-date market performance |
| American Airlines Group Inc. (AAL, Financial) | -58.02% |
| Carnival Corporation & Plc. (CCL, Financial) | -68.11% |
| Exxon Mobil Corporation (XOM, Financial) | -47.72% |
| Chevron Corporation (CVX, Financial) | -31.57% |
Source: Reuters
The companies in the above table are suffering from macroeconomic headwinds more than anything, and it's reasonable to assume that the outlook for these companies will change for the better as time passes by.
A quick look at the Shiller price-earnings ratio of different sectors reveals that the energy sector and the financial services sector are trading at a significant discount to the market average, which is a good place for investors to start their analysis.
The key to success would be to incorporate a thorough liquidity profile analysis into the valuation framework to filter out companies that are cheap for a reason.
The guru is long the market
Even though the headlines published by the financial media suggest Ackman is clearly sending a warning sign for investors, one should take the time to correctly evaluate his portfolio position. The guru has an overweight position on equities and the short position on corporate debt should be considered as a hedging activity, not a bet against the market in the long run. Active fund managers often use such strategies when the market volatility is expected to spike in the short run. At the end of October, Pershing Square had 10 long positions and no short positions.
Source: Pershing Square Holdings
Investors should look at this big picture and not let the recently announced short position cloud their judgment.
Takeaway
Ackman has once again decided to hedge against a possible U.S. economic crash, which is not good news for investors considering his recent success in predicting market downturns. However, his position against the market is much smaller this time, and the guru reiterated his belief that the American economy will stage a massive comeback in the coming years. Although he might be proven correct once again, the best approach for a retail investor would be to disregard short-term market movements and focus on the big picture. There are many bargains in unloved business sectors such as energy, retail, airlines and the cruise industry, and the leading players representing these business segments might report stellar numbers in 2021 if business conditions improve as expected.
Disclosure: The author owns shares of Starbucks Corporation.
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