Billionaire Bill Ackman‘s Pershing Square has been in the news through this year due to the poor performance of some of the fund’s top stock picks and its efforts to help turn Valeant around, which included the appointment of Mr. Ackman to the company’s board as a Director. Pershing Square recently gave a slideshow presentation to its European investors at its annual meeting, revealing its performance thus far in 2016 and its current view on its portfolio holdings. According to the presentation, the fund’s total assets under management (AUM) at the beginning of April stood at $11.37 billion and the fund lost 25.6% during the first quarter. However, it recovered some of the losses early in the second quarter as Valeant made a small rebound. As of April 19, the fund’s year-to-date losses stood at 16.8%. In the presentation, Pershing Square also highlighted it’s performance since inception, which remains stellar despite the recent struggles, as it has generated net returns of 476.7% since its inception versus the S&P 500’s gain of 143.7% during the same period. In this article, we are going to discuss five of Pershing Square’s notable positions and see what the fund thinks about their current prospects and expected performance.
We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).
Mondelez International Inc (NASDAQ:MDLZ)
– Shares Owned by Pershing Square (as of December 31): 43.37 Million
– Value of Pershing Square’s Holding (as of December 31): $1.94 Billion
– Q1 Return: -10.1%
Let’s start with Mondelez International Inc (NASDAQ:MDLZ), in which Pershing Square held a 5.7% stake (inclusive of its derivatives positions) at the time of its presentation. Shares of the confectionary giant tumbled in February after the company reported its fourth quarter results, but have been on an upward march since then and are currently trading down marginally for the year, by 2.6%. Pershing Square still remains confident about the future prospects of the company, seeing enormous potential for margin expansion. The fund applauded Mondelez International Inc (NASDAQ:MDLZ)’s move towards zero-based budgeting, but feels it is less robust than the zero-based budgeting that 3G Capital implemented in its portfolio companies. According to the fund, the $1.5 billion that Mondelez International invested recently in upgrading its manufacturing base could help the company expand its gross margins by as much as 250 basis points by 2018. In the presentation, Pershing Square acknowledged that the company “is making progress with their plan to increase margins to 17-18% by 2018”, however, it believes “optimized margins are far higher”. Hedge funds that reduced their stake in Mondelez International during the first quarter included Ray Carroll‘s Breton Hill Capital, which reduced the size of its holding down by 15% to 35,633 shares.
Zoetis Inc (NYSE:ZTS)
– Shares Owned by Pershing Square (as of December 31): 41.82 Million
– Value of Pershing Square’s Holding (as of December 31): $2.00 Billion
– Q1 Return: -7.3%
Zoetis Inc (NYSE:ZTS) has been one of the best performing equity picks of Pershing Square since the fund initiated a stake in the company in July 2014. According to the fund’s presentation, Zoetis Inc (NYSE:ZTS)’s stock was trading up by 33% from the fund’s average purchase price as of April 21 and Mr. Ackman’s firm continues to own 41.82 million or 8.4% of the outstanding shares of the company. In its presentation, Pershing Square highlighted how the Comprehensive Operational Efficiency Initiative that the company launched last year has delivered quick results, helping Zoetis lower its currency adjusted SG&A expenses by 7% year-over-year and its R&D expenses by 9% year-over-year, during the fourth quarter. Due to the significant progress displayed by the company in the past few quarters, Pershing Square elected to not re-appoint its investment team member Bill Doyle for another term as a Director on the company’s board. For the first quarter, analysts are expecting Zoetis Inc (NYSE:ZTS) to report EPS of $0.41 on revenue of $1.10 billion, the same numbers that it reported for the same quarter of the previous year. William Von Mueffling‘s Cantillon Capital Management upped its stake in Zoetis Inc by 173% during the fourth quarter.
We share Pershing Square’s thoughts on Air Products & Chemicals, Valeant, and Herbalife on the next page.