(The Motley Fool) - Billionaire investor Bill Ackman first rose to fame during the housing crisis that sparked the Great Recession when he shorted shares of Municipal Bond Insurance Association and purchased credit default swaps against the company's debt.
Since then, Ackman and his fund Pershing Square Capital Management have had other victories, including getting the fast food chain Wendy's to spin off Tim Horton's, and some epic battles with the dietary supplement and marketing company Herbalife.
Since Pershing's founding in 2004, the fund has generated annualized returns of 17%. Today, Pershing owns just six stocks. Let's take a look.
Lowe's: 23.5% of the portfolio
The large home improvement retailer Lowe's (LOW -0.21%) is currently the largest position in Pershing's portfolio, valued at more than $2 billion. Pershing first initiated the position in the second quarter of 2018 (it had briefly owned the stock in 2011) and while there have been some sales over the years, Lowe's has been a big winner for Ackman. Pershing first purchased shares of Lowe's for an average price of around $90 and today the company trades at around $210 per share.
Lowe's is clearly one of those stocks that greatly benefited from the pandemic because people were spending much more time in their homes, which drove home improvement purchases. Even after things have normalized, people are still utilizing their homes much more than they did before.
Restaurant Brands International: 17.8% of the portfolio
Restaurant Brands International (QSR -2.29%) is one of the largest fast-food companies in the world, formed in 2014 by a $12.5 billion merger between the fast-food giants Burger King and Tim Horton's. In 2017, the company acquired Popeyes.
Given Ackman and Pershing's past with Tim Horton's, it's no surprise to see them having a big position in this one, which Pershing has been in on since the beginning. It first purchased 38 million shares in 2014, spent the next six years selling a large portion of those shares, and then did a big reup in 2020 when it purchased another 10 million shares.
Restaurant Brands largely operates a royalty-based franchise model, which allows its restaurants to navigate the high inflationary environment because royalties are based on revenue from the franchise stores, which generally increases in an inflationary environment. Strong brand power enables companies to pass higher costs on to consumers without too much pushback.
Chipotle Mexican Grill: 17.5% of the portfolio
If you haven't guessed yet, Ackman seems to have a taste for popular consumer-facing restaurant chains, and another one he has held since 2016 is Chipotle Mexican Grill (CMG -1.93%). Chipotle has also been a big winner for Ackman. Pershing purchased the bulk of Chipotle shares for an average price of $375, and the stock now trades at around $1,610.
As a result of high inflation, Chipotle has raised its prices intensely. As of July of last year, prices were up about 20% from the end of 2020. But the price hikes really haven't slowed down Chipotle's main customer base. While the company does trade at 50 times earnings, that's pretty much in line with its historical range.
Hilton Hotels: 14.4% of the portfolio
Pershing opened a stake in Hilton Hotels (HLT 1.03%) toward the end of 2018 and it's proved to be a timely acquisition. Pershing first acquired the stock for an average cost of roughly $72 per share and it currently trades around $145 per share. The stock has greatly benefited from the big rebound in travel in 2022, although after a strong year of earnings, management is expecting travel to soften this year. Still, investors seem excited about the company's new Spark brand, which will target travelers on a budget.
Howard Hughes: 13.8% of the portfolio
Pershing first purchased the real estate developer Howard Hughes (HHC -0.83%) all the way back in 2010, making it one of its longest holdings. It was the only stock that Pershing bought more of in the fourth quarter of 2022, boosting its stake by nearly 2.3 million shares.
The company is a developer of a range of properties, including commercial, retail, and mixed-use. Howard Hughes also builds residential condos and master-planned communities, which are residential communities that also come with amenities. If you ask management, they would tell you that Howard Hughes trades at a severe discount at its current level of $88. In a sum-of-the-parts valuation, management said they believe the stock is worth $170.
However, the stock has not come close to this level in many years and earnings have not really been able to grow consistently, despite bouncing back this year. Investors in this high-interest rate environment are also watching real estate stocks with a cautious eye amid dropping home prices and concerns about what might happen if there is a recession.
Canadian Pacific Railway: 12.9% of the portfolio
Ackman got back to his roots at the end of 2021 when Pershing reopened a position in the freight and logistics company Canadian Pacific Railway (CP 0.89%).
Ackman had been an activist in this company between 2012 and 2016 and helped advocate for a new CEO and board of directors. But he previously said that selling Pershing's stake in Canadian Pacific was one of his biggest regrets and he thinks Chief Executive Keith Creel has done a great job with the company.
Currently, the company is waiting on approval for its $27 billion merger with Kansas City Southern Rail, which would create the first unified rail network connecting the U.S., Canada, and Mexico. Ackman's investment in Canadian Pacific is also likely a longer-term bet on the North American economy.
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By Bram Berkowitz
February 23, 2023
