Billionaire investor Bill Ackman (Trades, Portfolio), head of Pershing Square Capital Management, is known for taking large positions in a handful of underperforming companies and pushing for change in order to unlock value for shareholders.
While the guru’s New York-based hedge has recently found success with Chipotle Mexican Grill Inc. (CMG, Financial) and Starbucks Corp. (SBUX, Financial), one of its most well-known activist targets, which did not end favorably, was Valeant Pharmaceuticals. Ackman also pursued an unsuccessful short of Herbalife Nutrition Ltd. (HLF, Financial), which he bowed out of in 2018.
In the current environment of high inflation, rising interest rates and geopolitical uncertainty, many investors are likely looking for opportunities to take advantage of as we head into a new year. As a result, they may be interested in some of the stocks in the guru’s $7.88 billion equity portfolio that are undervalued according to an earnings-based discounted cash flow model.
GuruFocus portfolio data, which is based on 13F filings as of Sept. 30, shows current positions in Ackman’s equity portfolio that have a solid margin of safety and high predictability are Lowe’s Companies Inc. (LOW, Financial) and Canadian Pacific Railway Ltd. (CP, Financial).
Investors should be aware 13F filings do not give a complete picture of a firm’s holdings as the reports only include its positions in U.S. stocks and American depository receipts, but they can still provide valuable information. Further, the reports only reflect trades and holdings as of the most-recent portfolio filing date, which may or may not be held by the reporting firm today or even when this article was published.
Lowe’s Companies
Shares of Lowe’s Companies (LOW, Financial) are trading at a 42.61% discount to their fair value of $351.32 according to the earnings-based DCF model.
The Mooresville, North Carolina-based retail company, which operates a chain of home improvement stores, has a $121.96 billion market cap; its shares were trading around $201.89 on Wednesday with a price-earnings ratio of 19.75 and a price-sales ratio of 1.37.
The GF Value Line suggests the stock is modestly undervalued currently based on its historical ratios, past financial performance and analysts’ future earnings estimates.
Further, the GF Score of 96 out of 100 indicates the company has high outperformance potential, driven by solid ranks for profitability, growth and momentum and middling marks for GF Value and financial strength.
Despite Lowe’s issuing new long-term debt over the past three years, it is at a manageable level due to adequate interest coverage. The high Altman Z-Score of 3.69 also indicates the company is in good standing. Further, the return on invested capital eclipses the weighted average cost of capital, meaning value is being created as the company grows.
The company is also being supported by expanding margins and strong returns on equity, assets and capital that outperform a majority of competitors. It has a high Piotroski F-Score of 7 out of 9, indicating operating conditions are healthy. However, the predictability rank of five out of five stars is on watch even though the company has recorded consistent earnings and revenue growth. According to GuruFocus research, companies with this rank return an average of 12.1% annually over a 10-year period.
Of the gurus invested in Lowe’s, Ackman has the largest stake with 1.67% of its outstanding shares. Jim Simons (Trades, Portfolio)’ Renaissance Technologies, Ken Fisher (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Elfun Trusts (Trades, Portfolio), PRIMECAP Management (Trades, Portfolio), Ron Baron (Trades, Portfolio), Third Avenue Management (Trades, Portfolio), Joel Greenblatt (Trades, Portfolio) and Jeff Auxier (Trades, Portfolio) also have notable positions in the stock.
Canadian Pacific Railway
Generating a DCF fair value of $83.82, shares of Canadian Pacific Railway (CP, Financial) are trading with a 9.27% margin of safety.
The Canadian railroad operator, which now has a rail network that spans Canada, the U.S. and Mexico following the 2021 acquisition of Kansas City Southern, has a market cap of $70.06 billion; its shares were trading around $76.03 on Wednesday with a price-earnings ratio of 31.22, a price-book ratio of 2.55 and a price-sales ratio of 10.74.
According to the GF Value Line, the stock is significantly overvalued currently.
The GF Score of 83 indicates the company has good outperformance potential. While Canadian Pacific received high ratings for growth, profitability and momentum, financial strength was more moderate and the GF Value rank was low.
Although the company has issued new long-term debt over the past three years, it is at a manageable level due to sufficient interest coverage. The Altman Z-Score of 2.10, however, indicates the company is under some pressure since assets are building up at a faster rate than revenue is growing.
Canadian Pacific is being supported by operating margin expansion as well as strong returns that top over half of its industry peers. In addition, the moderate Piotroski F-Score of 5 means conditions are typical for a stable company. As a result of a slowdown in revenue per share growth over the past 12 months, the 4.5-star predictability rank is on watch. GuruFocus data shows companies with this rank return an average of 10.6% annually.
With 1.64% of its outstanding shares, Ackman is the company’s largest guru shareholder. Other top guru investors of Canadian Pacific include Baillie Gifford (Trades, Portfolio), Steven Cohen (Trades, Portfolio), Fisher, Simons’ firm, Ray Dalio (Trades, Portfolio)’s Bridgewater Associates, Prem Watsa (Trades, Portfolio) and First Eagle Investment (Trades, Portfolio).
