A well-known activist investor, he’s not afraid to bet big on his favorite ideas.
Bill Ackman is one of the world’s most famous billionaire investors. His hedge fund, Pershing Square Capital, focuses on a small number of blue-chip companies that Ackman feels are mispriced relative to their value. He then intends to buy the stock and use his influence to extract value for shareholders.
As an activist investor, he can only focus on so many businesses at a time. That means he only swings when he thinks he has the best chance. As a result, Pershing Square’s portfolio is highly concentrated, with just three stocks accounting for more than 53% of its total public equity holdings of $10.6 billion.
1. Hilton Worldwide (19.7%)
Hilton Worldwide (HLT -0.52%) has grown into Ackman’s largest position in Pershing Square. The investor first accumulated a stake in the world’s largest hotel operator in 2016, but it wasn’t until 2018 that he had the opportunity to build a significant position in the stock during a market downturn.
“Hilton’s extensive and growing network of brands and properties provides a significant and self-reinforcing value proposition for both guests and hotel owners,” Ackman wrote to investors in 2018. It is creating a strong competitive moat around the business.”
That moat will only grow stronger as Hilton expands to 24 brands and more than 7,700 participating hotels. The company’s loyalty program has grown from Ackman’s investment of 80 million in 2018 to more than 195 million today. These two create a network effect. The more hotels that join Hilton’s portfolio, the more customers it attracts to its loyalty program, and vice versa.
Hilton has grown rapidly to support its expansion. Revenue per available room increased 3.5% in the second quarter, and management expects full-year growth to be 2% to 3%. There is also an additional 508,300 rooms in the development pipeline. As Hilton expands its management business, revenue per room should increase and profit margins should expand significantly.
Mr. Ackman sold some of his Hilton stock in the second quarter to secure a small new position, but the company still owns about 9 million shares worth $2.1 billion. That will be his biggest position. At its current price, the stock trades near the high end of the company’s historical enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization) range, excluding the impact of the COVID-19 pandemic. Investors may want to consider Hilton more carefully before following Ackman’s lead.
2. Alphabet (18.2%)
While many saw artificial intelligence (AI) as a major threat to Alphabet’s (GOOG -2.47%) (GOOGL -2.44%) flagship Google Search business, Ackman said the company’s recent innovations in AI I thought there was an opportunity to take advantage of it. He bought the company’s stock in the first quarter of 2023, just as the AI boom was beginning. Since then, he has increased his position and currently holds 7.5 million C shares and approximately 4 million A shares. Together they are worth about $1.9 billion.
Google has established itself as one of the three largest public cloud platforms, and its Google Cloud business is performing well. Quarterly revenue exceeded $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 capabilities in Google Search. Their efforts are paying off, with executives saying the new AI overview feature in search has increased engagement and satisfaction with search results. However, the company cut costs in other areas, leading to higher operating margins.
The company’s stock price is currently trading at a forward price/earnings ratio (PER) of approximately 20 times. Meanwhile, analysts expect Alphabet’s profit growth to average more than 20% over the next five years, driven by AI and other trends. That makes Alphabet a very attractive stock at its current price.
3. Chipotle Mexican Grill (15.5%)
Ackman established an early position in Chipotle Mexican Grill (CMG -0.67%) in 2016 after the stock price fell sharply due to food safety concerns. By the end of the year, he had bought up 2.9 million shares. Since then, he has sold about 80% of his position, but Chipotle remains one of Pershing Square’s largest holdings, valued at about $1.6 billion.
He cited Chipotle’s strong brand, differentiated products and significant scale as reasons to believe the company can recover from last year’s food safety challenges. He saw an opportunity to double the chain’s store count from about 2,200 at the end of 2016.
Today, traffic has more than recovered and Chipotle operates 3,530 restaurants. Management said it envisions opening 7,000 stores over the long term.
Even though Chipotle is opening new stores at a strong pace, its existing stores are performing well. Same-store sales increased 11% in the most recent quarter, driven by both transaction volume and average ticket count. The company is also developing its Chipotlanes drive-thru concept, which includes about 80% of new store openings.
These will help drive further same-store sales growth. Strong same-store sales improved restaurant-level operating margins, rising 140 basis points year over year to 28.9% in the second quarter.
Chipotle recently lost CEO Brian Nicol to Starbucks. As CEO since 2018, Mr. Ackman has been primarily responsible for much of the company’s turnaround and success since taking over at the end of 2016. But Chipotle has a good strategy for success and a long road to continued growth.
That said, the stock’s valuation has increased, reflecting the company’s strong outlook. The stock currently trades at 44 times next year’s expected P/E ratio. With such a premium, investors may want to wait for a pullback before placing their next order in Chipotle stock.
Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. Adam Levy holds positions at Alphabet and Starbucks. The Motley Fool has positions in and recommends Alphabet, Chipotle Mexican Grill, and Starbucks. The Motley Fool recommends the following options: Short December 2024 $54 on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
