Bill Ackman’s Pershing Square Holdings is having a stellar 2019. It’s seen a YTD (year-to-date) gain of 48.9% as per its letter to shareholders. Pershing has thusfar significantly outperformed the S&P 500 (SPY), which is up just 18.2% in the same period. Bill Ackman’s renewed focus on the basics of investing has helped the fund outperform the benchmark in 2019. Ackman is known for his value investing style, wherein he takes stakes in companies and then pushes for changes to unlock value for investors. He sells stakes in companies he thinks have reached the fund’s estimate of intrinsic value.
Chipotle Mexican Grill is the highest contributor to Pershing’s gains
Among the bets that have contributed to Pershing’s outperformance in 2019, Chipotle Mexican Grill (CMG) is the most notable. CMG was up 89.2% YTD on August 13, making it the top performer in the S&P 500 Index. Chipotle accounted for 14% of Pershing’s gains. Compared to Pershing’s initial investment in the company three years ago, the stock has almost doubled.
Pershing expects more upside from CMG
Chipotle’s second-quarter results were impressive. Its EPS of $3.99 beat analysts’ estimate of $3.76. The key driver behind CMG’s beat was its SSSG (same-store sales growth), which came in at 10.0% against the market’s expectation of 8.3%. CMG’s management also raised its guidance for 2019 SSSG. Ackman’s Pershing Square has a strong conviction about Chipotle stock. In its letter, the fund stated that most of the management’s key initiatives were still in their early stages. Pershing expects CMG’s extensive pipeline of growth initiatives and the stock’s attractive customer value proposition to “continue to generate superior levels of sales and profit growth.” You can read more about Chipotle’s contribution to the fund in our series Chipotle’s Impressive Reversal Gives Ackman Record Gains.
Restaurant Brands International
Restaurant Brands International (QSR) is the second-largest contributor to Pershing’s gains YTD at 8.3%. The stock was up 45.2% YTD on August 13. Restaurant Brands is the parent company of Popeyes Louisiana Kitchen, Burger King, and Tim Hortons. Pershing believes that despite the stock’s significant appreciation this year, it remains at a “discount to its intrinsic value and slower-growth franchised peers.” The fund believes that as the SSSG momentum continues, investors are likely to give credit to the company’s “long-term international growth opportunities and assign a higher valuation to its shares.”
Starbucks (SBUX) remains another strong contributor to the fund’s YTD gains. SBUX has gained 51.7% in 2019, contributing 7.6% of Pershing’s gains through August 13. The fund first took a stake in Starbucks in the third quarter of 2018 at an average cost of $51 per share. Since then, the stock has returned 96% for the fund. Starbucks’s third-quarter earnings were impressive with adjusted EPS of $0.78 compared to analysts’ estimate of $0.72.
The company’s management credited beverage innovations, expanded digital relationships, and an enhanced customer experience for its strong sales growth. While the fund acknowledges that SBUX has started trading at a premium to its historical average, it believes that due to strong underlying EPS growth and near-term momentum, the current earnings estimates could prove to be conservative.
Hilton Worldwide and Howard Hughes
Hilton Worldwide (HLT) and Howard Hughes (HHC) have each risen 33.3% YTD, contributing 5.3% and 2.7%, respectively, to Pershing’s total gains so far this year. The fund has a strong conviction in Hilton and believes that its fee-based model, large development pipeline, and substantial share buyback program remain underappreciated by the market. It believes that even after a 33% share gain this year, the stock is trading at 23x its 2019 EPS estimate—a discount to the historical average.
Pershing also continues to believe that Howard Hughes is trading at a large discount to its underlying net asset value per share. In June, the company announced that it was conducting a broad review of strategic alternatives, including a possible sale. The news led to a huge surge in the stock’s price. Pershing is now looking forward to the results of the strategic review.