Activist investor Bill Ackman (Trades, Portfolio)’s Pershing Square Capital Management recently released its 13F filing for the first quarter of 2022, which ended on March 31.
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 company’s strategy in order to further increase its expected profitability.
According to its latest 13F report, the firm’s top trade of the quarter was a new buy for Netflix Inc. (NFLX, Financial), though it’s important to note that Ackman has issued a statement saying his firm sold out of the Netflix position already following its first-quarter subscriber loss. The firm also made an addition to Canadian Pacific Railway Ltd. (CP, Financial) and reduced its holdings in Hilton Worldwide Holdings Inc. (HLT, Financial), Domino's Pizza Inc. (DPZ, Financial) and Lowe's Companies Inc. (LOW, Financial).
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Netflix
Ackman’s firm ended the first quarter with a 3,109,965-share stake in Netflix (NFLX, Financial), giving the video streaming giant a weight of 11.21% of the equity portfolio. During the quarter, shares traded for an average price of $417.64.
However, shortly after the quarter ended, Ackman abruptly reversed his stance on Netflix in response to the company’s disappointing first-quarter earnings. The sale won’t show up in regulatory filings until the second-quarter 13F is released; Pershing Square only acquired 0.70% of Netflix’s total shares outstanding, which is far below the 5% threshold to necessitate a Form 4 filing.
Ackman wasn’t the only investor spooked by Netflix’s surprise decline in subscribers. The bad news triggered a heavy sell-off in the stock; it has now fallen to the same price as it was in 2017, reaching a price-earnings ratio of 16.39 compared to its 10-year median price-earnings ratio of 126.92.
Canadian Pacific Railway
Pershing Square added another 130,512 shares to its Canadian Pacific Railway (CP, Financial) holding for a total of 2,944,259 shares. At the quarter’s average share price of $75.22, the trade had a 0.10% impact on the equity portfolio.
Canadian Pacific owns approximately 21,100 kilometers of railroad track across all provinces of Canada as well as parts of the northern U.S. In addition to providing key supply chain infrastructure, Canadian Pacific is also known for offering train tours.
Due to their critical roles in the supply chain and near-monopolies over their areas of operation, railroads have historically tended to be solid investments, even if their returns haven’t been anything to write home about. In general, they are also considered good inflation-proof investments, since they can rely on high profit margins and cash flows and thus benefit from the natural devaluation of their debt during periods of high inflation.
Hilton Worldwide Holdings
The firm reduced its Hilton Worldwide Holdings (HLT, Financial) investment by 2,642,049 shares, leaving a remaining holding of 9,952,287 shares. The trade reduced the equity portfolio by 3.82%. Shares averaged $147.51 apiece during the quarter.
Hilton Worldwide Holdings is a global hospitality company based in McLean, Virginia. It manages and franchises a variety of hotels and resorts across the Americas, the Caribbean, Europe, the Middle East, Africa, Asia and Oceania.
A hospitality company is undeniably a risky bet going into a period of high inflation, rising interest rates and looming recession. Nevertheless, Hilton is widely diversified and owns strong brand names, which should help protect against downside risks. The GF Value chart rates the stock as significantly overvalued.
Domino's Pizza
The firm also trimmed its investment in Domino's Pizza Inc. (DPZ, Financial) by 24,171 shares for a remaining stake of 2,068,031 shares, slimming the equity portfolio by 0.13%. During the quarter, shares traded for an average price of $436.61.
Ann Arbor, Michigan-based Domino's Pizza is a large-scale pizza chain. Even before the pandemic, more than half of Domino’s orders arrived on customers’ plates via delivery rather than dining in, so both the company and the stock were pandemic darlings.
The stock has now come off its all-time highs reached near the end of 2021. Given the stability of its earnings history, represented by a GuruFocus business predictability ranking of five out of five stars, Domino’s is likely to continue chugging along with business as usual in the long term. The return on invested capital consistently beats the weighted average cost of capital, indicating value creation.
Lowe's Companies
Pershing Square trimmed its stake in Lowe's Companies Inc. (LOW, Financial) by just 29,165 shares, leaving a remaining holding of 10,207,306 shares. The trade took 0.07% off the equity portfolio at the quarter’s average share price of $230.10.
Lowe’s is a retail company that owns and operates a chain of over 2,300 home improvement and hardware stores. Most of the North Carolina-based company’s stores are in the U.S., though it has some in Canada as well.
Home improvement spending has skyrocketed in recent years, resulting in Lowe’s seeing a three-year revenue per share growth rate of 16.2% and a three-year Ebitda per share growth rate of 42.2%. Its main competitor, Home Depot (HD), has also posted double-digit top and bottom-line growth, though it is lagging Lowe’s.
Portfolio overview
As of the quarter’s end, Pershing Square’s equity portfolio consisted of eight stocks valued at a total of $10.39 billion. The turnover for the period was 11%.
The top holdings were Lowe’s with 19.86% of the equity portfolio, Chipotle Mexican Grill (CMG) with 16.97% and Hilton with 14.53%.
By sector, the firm had nearly two thirds of its portfolio invested in consumer cyclical stocks.
