Bill Ackman Logs Third Consecutive Down Year

Ackman’s investments at Pershing Square Capital Management LP posted negative returns for the third straight year in 2017, according to fund documents.

The hedge fund manager’s Pershing Square Holdings Ltd. portfolio slumped 2.6% in gross performance and 4% net of fees for the year. The figure came as gains in Nomad Foods Ltd. (NYSE:NOMD) and Restaurant Brands International Inc. (NYSE:QSR) failed to fully offset losses in Chipotle (NYSE:CMG) and Herbalife (NYSE:HLF). Ackman also released the biggest drag on his portfolio of the last two years, Valeant Pharmaceuticals (NYSE:VRX), early in 2017.

Though returns continued in negative territory, 2017 marked the investor’s best year since 2014. In 2015 he lost 19.3%, and in 2016 he went down 12.1%. Ackman’s negative streak followed several years on an investing mountaintop and was an abrupt change from his 50.6% gross performance in 2014.

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For 2017, Ackman’s best performer, packaged foods company Nomad Foods Ltd. (NYSE:NOMD), leaped 76.7% as the market reacted positively to its three consecutive quarters of positive organic revenue growth. Sales growth was stimulated by gains in market share and category growth.

When Ackman started the investing in the second quarter of 2015, he also added a member of his investment team to the board and played a role in its acquisition of European branded frozen food company Iglo. A second acquisition, of non-U.K. assets of Findus, followed in August.

Ackman cashed out of the holding in September, selling 33.3 million shares in a registered underwritten public offering. In a third quarter letter, Ackman disclosed that he reaped a 35% gain from the initial cost of his investment in Nomad.

Leading Ackman’s worst performers was Chipotle Mexican Grill, whose shares dropped 23% for the year as food safety issues that began at the fast-casual chain in 2015 persisted with new reports in July and December. In November, the company announced that it would had launched a search for a new CEO with “turnaround expertise” to replace the restaurant’s founder Steve Ells.

In the third quarter, Chipotle recorded an 8.8% year-over-year increase in revenue to $1.13 billion, with comparable restaurant sales up 1.0%. Diluted earnings per share also rose to 69 cents, from 27 cents in the prior year’s third quarter. The company also opened 38 new restaurants and closed or relocated three.

Ackman said in a third quarter letter that though the stock was volatile, it had a “substantial” cash position and no debt. He attributed the volatility to investors making vastly different calculations of future growth, average unit volumes and store margins.

“If the company begins to show progress on these metrics, we would expect the stock price to respond accordingly to the upside,” he said.

Herbalife shares went on a 40.7% tear for 2017, forcing Ackman to recalibrate his approach to shorting the company. Ackman began a $1 billion short bet against the nutritional products company in 2012, accusing it of running a pyramid scheme, which the company has denied.

In November, Ackman said he converted his entire Herbalife short position into a put position equal to 3% of Pershing Square’s capital, limiting his losses to the market value of the put options.

“And as a result there is no longer an opportunity to squeeze Pershing Square,” he told CNBC.

Ackman also said the firm had been “entirely right on our Herbalife investment in terms of the fundamentals of the business” but “wrong” on the share price.

Part of the boost in Herbalife’s share price has come from its aggressive stock repurchase program. In August, the company said it would begin buying back $600 million in its shares after ceasing talks with a prospective investor who wanted to take it private. Ackman said in a third-quarter letter that Herbalife has repurchased roughly one-third of its shares since Pershing took a short position.

The controversial company has grown revenue at a rate of 14% over the past five years, with EBITDA rising at a 5.2% rate for the same period.

Carl Icahn (Trades, Portfolio), the influential activist investor who took the opposite side of Ackman’s trade, is Herbalife’s largest shareholder with 22.8 million shares, worth 25.6% of the company. He has seen the position’s value increase by an estimated 57% since starting it in the first quarter of 2013.

The market may expect the two investors to take fewer public shots at each other over the investment, as they have done for almost five years, as 2018 plays out.

“Going forward we intend to substantially limit our comments on Herbalife in light of the reduced capital in the investment and because we believe that further comments from us may distract investors from Herbalife’s deteriorating business fundamentals,” said Ackman, who called the third-quarter letter his “last detailed communication on Herbalife.”

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