Bill Ackman, a prominent activist hedge fund manager and CEO of Pershing Square Capital Management, is well known in the industry for his various investment strategies. His short and long bets have become well known in the industry over the last ten years.
Pershing Square’s top buys
Pershing Square’s top buy was Berkshire Hathaway (BRK.B) in the second quarter. Berkshire became Pershing’s single best new investment in the period. The company bought nearly 3.5 million shares of Berkshire Hathaway, representing 11.16% of its portfolio.
Berkshire Hathaway has returned nearly 47.2% over the last five years. On a YTD (year-to-date) basis, the stock has returned 0.3% as of August 30. The Financial Select Sector SPDR ETF (XLF), which tracks the performance of the financial sector, has returned 12% YTD as of August 30. The same ETF has returned 43% over the last five years. The broader market S&P 500 Index (SPY) has returned 48.3% over the last five years. Major financial stocks try to perform well when there’s an improvement in economic activity. Financial transactions increase when corporations increase their capabilities in the economy, which helps financial companies increase their profit bases.
Ackman’s fresh investment in this financial stock signals that Pershing is making some changes to its investment strategy. Earlier we saw that Pershing has mainly invested in consumer discretionary stocks. Among consumer discretionary companies, the company has a great interest in various restaurant brands.
Top fund manager Stanley Druckenmiller accumulated gold mining stock Barrick Gold (GOLD) in the second quarter. GOLD has risen over 40% in 2019 so far. Gold usually outperforms other asset classes in the event of an economic slowdown. Moreover, George Soros increased his short position in the S&P 500 Index. Ray Dalio has ranked the possibility of a recession at 40% for the next three years.
Pershing Square’s top holdings
Pershing’s top five holdings in the second quarter were Chipotle Mexican Grill (CMG), Restaurant Brands International (QSR), Hilton Worldwide Holdings (HLT), Lowe’s Companies (LOW), and Starbucks (SBUX). These holdings represented weights of 19.47%, 16.21%, 15.97%, 13.38%, and 11.63%, respectively, in the company’s portfolio in the second quarter. Its investments in major restaurant brands signal that it’s taken an interest in the industry.
The Consumer Discretionary Select Sector SPDR ETF (XLY), which tracks the performance of the consumer discretionary sector, had returned 20% on a YTD basis as of August 30. Since the last recession, XLY has risen 400%, the biggest rise among sector-specific SPDR ETFs.
The same ETF has returned 79% over the last five years. Like financials, the consumer discretionary sector is cyclical in nature. It generally performs well when there’s an uptrend in the economy. When the economy does well, peoples’ income capabilities improve. Rising income capabilities generally increase discretionary spending.
Based on institutional holdings data, Ackman’s hedge fund was the third-largest investor in Chipotle Mexican Grill. The company held nearly 1.8 million CMG shares in the second quarter. The Vanguard Group was the largest investor in the stock with around 2.9 million shares. Pershing Square was the largest investor in Restaurant Brands International in the quarter. It held 15.6 million QSR shares.
The company’s top sales in the second quarter were of United Technologies (UTX), Lowe’s Companies (LOW), Restaurant Brands International (QSR), and Chipotle Mexican Grill (CMG) stocks. Although Pershing reduced some of its holdings by minor percentages in LOW, QSR and CMG in the quarter, these stocks remained among its top holdings. The company reduced its holdings by nearly 11.16 %, 1.8%, 1.5%, and 0.22%, respectively, in UTX, LOW, QSR, and CMG in the quarter.
Past investment strategies
In the past, Ackman’s short position in Herbalife Nutrition (HLF) became well known in the industry. He held this short position from 2012 to 2018. According to him, the company has a pyramid structure for its multilevel marketing strategy, which isn’t great for its business model. The stock returned 126% from 2012 to 2018.
Ackman’s company took a long position in Valeant Pharmaceuticals (VRX) in 2015. Ackman liked the company’s fundamentals and expected it to provide a strong return in the near future. However, the pharmaceutical company has seen a huge fall in its performance in the past few years. Pershing lost nearly $4 billion in this position and closed it in 2017.
Ackman’s long and short bets in recent years have weighed on its portfolio. Now, Pershing’s sudden change in strategy and fresh new investment in financial giant Berkshire Hathaway indicates that the game could be changing for the company.