The Ira Sohn conference invites a number of well-known investment managers to give public presentations of their favorite investing ideas. This year, billionaire Bill Ackman of Pershing Square- except for a brief reference to his last public presentation, when he recommended shorting Herbalife Ltd. (NYSE:HLF) – focused on the long case for The Procter & Gamble Company (NYSE:PG). We think that this was a highly questionable pick. Ackman’s interest in The Procter & Gamble Company (NYSE:PG) is well known; in fact, about a year ago he reported to investors that Pershing Square had sold out of Citigroup Inc (NYSE:C) in order to buy shares of the personal products company. The fund bought nearly 22 million shares of The Procter & Gamble Company (NYSE:PG) during the second quarter of 2012, according to SEC filings (research more of Ackman’s long positions over time), for a position of $1.3 billion. Pershing Square has since added some shares. At the time, we estimated that the fund had lost nearly $400 million on its Citigroup investment (read our coverage of Ackman’s trade).
The average price of The Procter & Gamble Company (NYSE:PG) during Q2 2012 looks to have been about $64. At a current price of $78, then, Ackman has indeed generated profits with a 22% gain. However, these results have essentially matched those of the S&P 500 and so his decision to go long The Procter & Gamble Company (NYSE:PG) is not necessarily that admirable. In addition, Citigroup (along with many other large banks) have been on a tear in the last year with that stock in particular up over 50%. Pershing Square didn’t just lose money on Citi while the fund owned it- Ackman and his team sold out of the stock near the bottom in exchange for a consumer staples stock which has only performed in line with the market.
If we assume that Pershing Square sold Citigroup at about $30 per share- which looks to be about its Q2 midpoint- then the fund has missed out on a 64% return or $19 per share x 26 million shares = about $500 million. It has earned, by our reckoning, $14 per share x 22 million shares = about $310 million shares in The Procter & Gamble Company (NYSE:PG), but that still leaves Pershing Square about $200 million short- which would represent $40 million in carried interest- even with the fund investing more capital in Procter & Gamble than it did in Citigroup. In other words, Ackman is already “in the red” in his decision to dump Citigroup and buy P&G.
Ackman’s argument for Procter & Gamble as not only a market-beating stock, but as his best idea, also seems unpersuasive. The manager has already criticized the company’s management for underperformance and efficiency, but aside from a suggestion that the CEO vacate some of the many Boards of Directors he is a member of Ackman’s own ideas for improvement were limited. In addition, we’d imagine that the opportunities for activist pressure are limited at a company with a market cap of over $200 billion.