Bill Ackman is one of the most famous billionaire investors in the world. His hedge fund, Pershing Square Capital, focuses on a few high-quality companies whose shares Ackman believes are mispriced relative to their value. He will then buy shares and use his influence to unlock shareholder value.
As an activist investor, he can only focus on a limited number of companies at a time. That means he only swings at what he thinks are his best opportunities. As a result, Pershing Square has a highly concentrated portfolio, with just three stocks accounting for more than 53% of its total $10.6 billion in public equity holdings.
1. Hilton worldwide (19.7%)
Hilton Worldwide (NYSE: HLT) has become Ackman’s largest position for Pershing Square. The investor first collected shares of the world’s largest hotelier in 2016, but it was not until 2018 that he had the opportunity to acquire a significant position in the shares during the market downturn.
“Hilton’s extensive and growing network of brands and properties offers a significant and self-reinforcing value proposition for both guests and hoteliers, creating a strong competitive position around the company,” Ackman wrote to investors in 2018.
That moat has only grown stronger as Hilton expanded the number of brands to 24 and has more than 7,700 participating hotels. The loyalty program has grown from 80 million when Ackman invested in 2018 to more than 195 million today. These two create a network effect: as more hotels join the Hilton portfolio, it attracts more customers to the loyalty program, and vice versa.
Hilton has grown rapidly to support its expansion. Revenue per available room grew by 3.5% in the second quarter and management expects growth between 2% and 3% for the full year. It also has a pipeline of 508,300 additional rooms under development. As Hilton expands its management operations, it should see nice margin expansion as revenue per room increases.
While Ackman sold some Hilton shares in the second quarter to make room for smaller new positions, his company still owns about 9 million shares worth $2.1 billion. That makes it his largest position. At its current price, it trades at the top of its historical enterprise value/EBITDA (earnings before interest, taxes, depreciation and amortization) range, excluding the impact of the COVID-19 pandemic. Investors may want to evaluate Hilton more carefully before following Ackman’s lead.
2. Alphabet (18.2%)
While many saw artificial intelligence (AI) as a major threat Alphabet‘S (NASDAQ: GOOG) (NASDAQ: GOOGL) As Google’s lead search business, Ackman saw the opportunity for the company to capitalize on recent innovations in AI. He bought shares of the company in the first quarter of 2023, just as the AI boom was taking off. He has since expanded his position and now owns 7.5 million C shares and almost 4 million A shares. Combined, they are worth about $1.9 billion.
Google’s position as one of the big three public cloud platforms has resulted in strong business results for its Google Cloud business. Quarterly revenue surpassed $10 billion in the second quarter, up from $7.3 billion at the end of 2022.
Alphabet is spending heavily on AI to support the growth of Google Cloud and build new AI features into Google Search. The efforts have paid off, as management says the new AI overview feature in search results has increased engagement and satisfaction with search results. That said, the company has made cuts in other areas, leading to a growing operating margin.
The stock currently trades at a price-to-earnings (P/E) ratio of around 20. Meanwhile, analysts expect AI and other trends to push Alphabet’s earnings growth above 20% on average over the next five years. That makes Alphabet a very attractive share at the current price.
3. Chipotle Mexican Grill (15.5%)
Ackman established a first position Chipotle Mexican Grill (NYSE: CMG) in 2016 after food safety concerns led to a massive sell-off in the shares. By the end of that year, he had gobbled up 2.9 million shares. Although he has since sold about 80% of that position, Chipotle remains one of Pershing Square’s largest holdings, worth about $1.6 billion.
He cited Chipotle’s strong brand, differentiated product and substantial scale as reasons to believe the company could recover from the food safety challenges of the previous year. He saw an opportunity for the chain to double the number of stores, from about 2,200 at the end of 2016.
Today, traffic has more than recovered and Chipotle operates 3,530 restaurants. Management said it plans to open 7,000 locations over the long term.
Chipotle is seeing strong performance from existing stores even as it opens new locations at a rapid pace. Same-store sales rose 11% in the most recent quarter, driven by both transaction volume and average ticket size. It also builds on the Chipotlanes drive-thru concept, which comprises about 80% of new store openings.
These can contribute to higher same-store sales growth. Strong same-store sales have led to improved operating margins at the restaurant level, which increased to 28.9% in the second quarter, an increase of 140 basis points year over year.
Chipotle recently lost its CEO Brian Niccol Starbucks. As CEO since 2018, he has been largely responsible for much of the recovery and success at the company since Ackman took over in late 2016. However, Chipotle has an excellent playbook for success and a long path to continued growth.
That said, the stock’s valuation has grown to reflect the company’s strong prospects. The shares currently trade at 44 times next year’s earnings estimates. With that kind of premium, investors might be better off waiting for a pullback before placing their next order for Chipotle stock.
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Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet and Starbucks. The Motley Fool holds positions in and recommends Alphabet, Chipotle Mexican Grill, and Starbucks. The Motley Fool recommends the following options: Short December 2024 put $54 on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Billionaire Bill Ackman has 53% of his hedge fund’s $10.6 billion portfolio invested in just 3 stocks, originally published by The Motley Fool
