In the ever-evolving world of finance, where conformity often seems like the safest route, there are those who thrive on challenging conventions.
Steering clear of conventional wisdom, Bill Ackman (Trades, Portfolio)'s investment journey through his renowned fund, Pershing Square, is a testament to his contrarian spirit.
While others may tread cautiously, Ackman's strategies are often characterized by their audaciousness and contrarian nature. In the realm of high-stakes finance, where the familiar is favored, he embraces the unfamiliar, the unconventional and the counterintuitive.
Let's delve into the enigmatic mind of Ackman and explore the contrarian essence of his investment choices (over $10 billion in value), which have the potential to redefine what it means to be a successful investor.
Ackman's strategy overview
For the second quarter, Ackman's portfolio reflects a strategic alignment with certain industry-specific fundamental rationales. The holdings indicate a focus on diverse sectors, including technology, hospitality, real estate and transportation. The guru's investment style, characterized by a blend of value investing, activism and event-driven strategies, can be discerned.
Chipotle Mexican Grill
In the second quarter, Ackman's Pershing Square held 953,608 shares of Chipotle Mexican Grill Inc. (CMG, Financial). This marks a decrease of 75,578 shares, or 7.34%, compared to the first quarter. The portfolio value of the holding is approximately $2.04 billion, and the stock has yielded a considerable return of 361.90% at the average price of $404.18.
At the current stock price, Chipotle’s forward price-earnings ratio is 42.93, which is above the sector median of 14.85 but significantly undervalued compared to its five-year historical average of 63.56. Similarly, the forward enterprise value-to-sales ratio of 5.46 is above the sector median of 1.18, but in line with its five-year historical average of 5.09.
Ackman's decision to reduce the position in Chipotle may reflect a balance between capitalizing on gains and maintaining exposure to a potentially still-attractive asset based on its absolute valuation.
Restaurant Brands
Pershing Square's position in Restaurant Brands International Inc. (QSR, Financial) consists of 23,348,135 shares. This represents a reduction of 846,031 shares, or 3.50%, compared to the first quarter. The value of the holding stands at approximately $1.81 billion. Ackman’s position has an average buy price of $41.01, implying a return of 72.20%, a considerable gain over time.
At the current market value, Restaurant Brands’ forward earnings multiple is 21.40, which is above the sector median of 14.85 and in line with its five-year historical average of 22.81. Similarly, the forward EV-to-sales ratio of 5.18 is above the sector median of 1.18, but in line with its five-year historical average of 5.63.
The move to book profit is very effective from a valuation perspective. However, the reduction is not significant, signaling further upside potential or a systematic exit strategy over the long term.
Lowe's
Ackman's Pershing Square holds 7,468,850 shares of Lowe's Companies Inc. (LOW, Financial), representing a substantial reduction of 2,567,264 shares, or 25.58%, compared to the previous quarter. The portfolio value of the Lowe’s position is approximately $1.68 billion.
The price return of 119.50% at the average buy price of $99.39 demonstrates Ackman's ability to identify undervalued assets, especially in the cyclical home improvement industry during periods of macro adversity.
At current price levels, Lowe’s forward price-earnings ratio is 16.27, just 9.57% above the sector median of 14.85 and in line with its five-year historical average of 17.73. Similarly, the forward EV-to-sales ratio of 1.88 is above the sector median of 1.18 as well as its five-year historical average of 1.60.
The move to book profit signifies diversity in valuation perspective and judgment. However, the reduction is significant, signaling moderate upside expectations over the long term due to the competitive state with leaders Home Depot (HD, Financial) and Walmart (WMT, Financial).
Hilton
Pershing Square holds 9,332,853 shares of Hilton Worldwide Holdings Inc. (HLT, Financial). Interestingly, there was only a marginal quarter-over-quarter change in the position, indicating relative stability. The investment's portfolio value stands at approximately $1.35 billion.
Notably, the substantial return of 94.70% was attained through the average buy price of $78.96. Hilton's position within Ackman's portfolio signifies a social movement toward the travel and hospitality sectors post-pandemic normalization. What is interesting here is his inclination toward consumption necessities at a broader level.
At current price levels, Hilton’s forward price-earnings ratio if 24.62, which is considerably higher than the sector median of 14.85, but significantly lower than its five-year historical average of 70.20. Similarly, the forward EV-to-sales ratio of 4.77 is above the sector median of 1.18 but still below its five-year historical average of 5.43.
The move to stabilize the position is in line with value investing principles. However, Ackman’s move signifies an inclination toward the absolute valuation of individual holdings.
Howard Hughes
Ackman owns 16,570,228 shares of Howard Hughes Holding Corp. (HHH, Financial) as of the end of the second quarter, representing an increase of 585,696 shares, or a 3.66% change from the previous quarter. The total value of the holding stands at $1.31 billion. The return (with an average buy price for the shares of $84.79) for Howard Hughes during this period was -7.20%, indicating a decrease in value.
From a value investment perspective, the enhancement of the position, while the return is negative, signifies Ackman’s solid confidence in the value and moat of Howard Hughes, which includes the competitive position within the real estate industry and the value growth potential for its properties and developments over the long term.
From an absolute valuation perspective, Howard Hughes’ non-GAAP price-earnings ratio (on a trailing 12-month basis) of 22.81 is below its five-year historical average of 40.73. However, it aligns with the sector median of 25.29. So, the enhancement of the position is becoming clear.
However, Howard Hughes’ trailing 12-month EV-to-sales ratio of 5.48 is below the sector median and 26.87% below the five-year historical average. Therefore, the current valuation levels justify the gradual increase in stock holdings.
Canadian Pacific Kansas City
As of the three months ened June 30, Pershing Square held 15,095,528 shares of Canadian Pacific Kansas City Ltd. (KP). Despite a small decrease of 0.9% (a quarter-over-quarter change of 142,516 shares), the holding retained a value of $1.22 billion. The stock exhibited a positive price return of 4.60% during this period, with an average buy price of $75.05.
The decision to hold a substantial position at Canadian Pacific despite massive overvaluation might stem from fundamental factors as opposed to valuation.
The relatively high value of the holding implies a certain level of conviction in the long-term prospects of Canadian Pacific. For instance, in terms of strategic positioning, market dominance, expansion plans or synergies resulting from the Kansas City Southern acquisition.
Alphabet
Ackman's Pershing Square has a significant position in Alphabet Inc. (GOOG, Financial)(GOOGL, Financial). The firm holds 9,377,195 shares of its Class C stock and 2,185,000 shares of its Class A stock. During the quarter, the firm increased its holding of Class C stock by 16.2% despite a 30.10% return, which indicates a strong expectation for upside potential in the company's market valuation. The position in the Class A stock was unchanged, delivering a return of 35.40%..
The decision to hold these positions could be underpinned by several fundamentals, especially to capitalize on artificial intelligence hype and related advancements. Alphabet, the parent company of Google, may significantly enrich its diversified portfolio, which includes search, advertising, cloud computing and other innovative technologies, with AI integration and quantum computing.
Alphabet’s forward price-earnings ratio of 23.06 is higher than the sector median, but below the five-year historical average. Further, its forward EV-to-sales ratio of 5.01 is above the sector median, but in line with the five-year historical average.
Therefore, the significant addition to the Class C position is justified with massive upside potential based on its leadership in emerging technologies, especially AI and quantum computing.
Takeaway
Source: Analyst’s compilation (13F filings info)
In conclusion, Pershing Square's second-quarter equity portfolio shows well-calculated moves on Ackman's part. Pershing Square invests using a dynamic blend of value, activist and event-driven strategies. It is capturing profits by boldly trimming the Chipotle and Lowe's positions while maintaining strategic stakes in Restaurant Brands, Hilton and Canadian Pacific, which signifies Ackman's acumen in seizing opportunities and managing risk.
