Pershing Square founder and CEO, William “Bill” Ackman, may not be a billionaire just yet but is well on his way. His fund was started in 2003 and takes a concentrated, research-intensive fundamental value approach. In recent years, Ackman has leaned toward the shareholder activist style, taking positions in then-bankrupt General Growth Properties (GGP) and J.C. Penney (JCP).
Bill Ackman’s top 10 holdings at the end of the first quarter are as follows:
|CANADIAN PACIFIC RAILWAY LTD||CP||1,834,943||0%|
|PENNEY J C CO INC||JCP||1,384,454||1%|
|GENERAL GROWTH PPTYS INC NEW||GGP||1,227,250||0%|
|KRAFT FOODS INC||KFT||589,390||-27%|
|FORTUNE BRANDS HOME & SECUR INC||FBHS||294,044||-36%|
|HOWARD HUGHES CORP||HHC||227,889||0%|
|ALEXANDER & BALDWIN INC||ALEX||176,594||2%|
|FAMILY DOLLAR STORES INC||FDO||165,468||-69%|
Pershing Square sees a lot less turnover than other hedge funds, given Ackman’s concentrated and often longer term approach. This quarter was especially quiet with Ackman mostly reducing positions in Kraft (KFT), Fortune Brands (FBHS), and Family Dollar Stores (FDO). Much of his time in the media has been around JCP, which he presented in detail at the Ira Sohn Conference in May. Among his main points are that JCP has been mismanaged for that last couple decades, that the company has advantages like owning much of its real estate, and that a new pricing strategy moving away from discounting will help attract brand names. JCP has already been cutting fat and bringing in a new and properly incentivized management team; last week, the company announced seven new hires and promotions in merchandising, operations, and investor relations.
Ackman likens JCP to The Gap (GPS) when Mickey Drexler started there. GPS, which has been very shareholder friendly in returning capital via stock buybacks and dividend increases, saw its stock price go up 60x during his time at the top. Over the past year, Macy’s (M) has been up around 30%. Based on less compelling valuation and challenging SSS comps, we are no longer buyers. We would have expected February SSS comps to increase as it took share from JCP, but the data did not reflect that. Its May SSS was up 4.2% compared to 8.0% for Marmaxx (TJX) and 8.0% for Ross (ROSS). Kohls (KSS) struggled with negative 4% but Sears (SHLD) managed to post double-digit increases in apparel and footwear. We view the lowered units per transaction and lean inventory as major factors that negatively impacted KSS sales. According to Ackman, JCP could trade between $77 and $125 in 2014, and given the pace of the changes being implemented and the strong execution team, we think that it is not out of the question. However, we wouldn’t buy any retailers at this point.
Bill Ackman also had a $954 million position in Citigroup (C) at the end of the first quarter. This is another stock that suffered significantly due to the European debt crisis. We are more bullish about banking stocks and think that Citigroup has the potential to double over the next three years. Investors who want to minimize volatility in their portfolio may consider a combination of positions in other banking giants as well. JP Morgan (JPM), Wells Fargo (WFC), and Capital One (COF) also have attractive price multiples.