Billionaire Bill Ackman’s Five Long-Term Picks

In the past couple of years, activist investor Bill Ackman has become a force to reckon with on Wall Street. Although Mr. Ackman first came in the limelight in 1995, when he bid for the famous Rockefeller Center in New York through his erstwhile investment firm Gotham Partners, the Street started paying serious attention to him only after he started his hedge fund Pershing Square in 2004 and launched high-profile activist campaigns against some of the largest and well-known companies in the US. In the past 12 years, Pershing Square has grown from $54 million in assets under management (AUM) to almost $14 billion in AUM, as of December 2015, and generated significant returns for its investors. According to Bloomberg, which named Pershing Square as the best performing hedge fund in 2014 among funds which had AUM of over $1 billion, the fund made a profit of over $3 billion on its $60 million initial investment in General Growth Properties Inc (NYSE:GGP) by initiating a stake in the mall operator at the end of the financial crisis.

With all these accomplishments, there is no doubt that Mr. Ackman is one of the best hedge fund managers on Wall Street today. However, unlike his peers, he has been able to perform so well while always maintaining a concentrated portfolio. Pershing Square’s latest 13F filing submitted with the SEC shows that fund had a US equity portfolio worth almost $12.5 billion at the end of December, but had long positions in only eight stocks. Since Mr. Ackman has performed so phenomenally well by betting on only a handful of stocks, in this post, we are going discuss in detail his top five long-term picks.

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).

#5 Howard Hughes Corp (NYSE:HHC)

– Shares Owned by Pershing Square (as of December 31): 3.56 million

– Value of Holding (as of December 31): $403.75 million

Howard Hughes Corp (NYSE:HHC) came into existence in the fourth quarter of 2010 after General Growth Properties Inc (NYSE:GGP) spun off several of its properties into a separate company. Even though Pershing Square sold off its entire stake in Growth Properties Inc (NYSE:GGP) during the first quarter of 2014, it has continued to hold the same stake in Howard Hughes Corp (NYSE:HHC) since the company got listed. However, going into 2016 Pershing Square trailed Murray Stahl‘s Horizon Asset Management as the largest shareholder of the company among the funds covered by us. Shares of Howard Hughes Corp have declined 35% in the past one year, largely due to the weakness in Houston’s housing market, which has been significantly affected by the heavy decline in crude oil and natural gas prices. On February 29, the company blew analysts’ expectations of a per share loss of $0.08 on revenue of $124.40 million for the fourth quarter, by reporting EPS of $0.59 on revenue of $229.40 million for that period.

#4 Platform Specialty Products Corp (NYSE:PAH)

– Shares Owned by Pershing Square (as of December 31): 42.74 million

– Value of Holding (as of December 31): $548.32 million

Pershing Square first initiated a stake in Platform Specialty Products Corp (NYSE:PAH) during the first quarter of 2014 and increased it by 29% during the last quarter of the same year. Since then it has continued to hold the same number of shares in the company. In the past one year, shares of Platform Specialty Products Corp (NYSE:PAH) have lost over two-third of their value. In the annual letter he released to his investors in January, Mr. Ackman acknowledged that Pershing was wrong in raising its stake in the company:

“Our most glaring, albeit small, unforced error was buying additional stock in Platform Specialty Products at $25 per share to assist the company in financing an acquisition. We paid too much as we assumed the new transaction would create substantial value, and because we assigned too much platform value to the company. Our assessment was incorrect as execution difficulties, operating issues, currency effects, and financing issues have destroyed rather than created value.”

Another hedge fund, which burned its fingers badly in Platform Specialty Products Corp in 2015 was John Griffin‘s Blue Ridge Capital, which increased its stake in the company from 10.95 million shares to 12.78 million shares during the year. A majority of analysts feel that the acquisition spree that the company went on since it got listed is to be largely blamed for the collapse in its stock and they are not too optimistic about the company’s future going forward.

 #3 Canadian Pacific Railway Limited (USA) (NYSE:CP)

– Shares Owned by Pershing Square (as of December 31): 13.94 million

– Value of Holding (as of December 31): $1.78 billion

Like the two stocks mentioned previously, shares of Canadian Pacific Railway Limited (USA) (NYSE:CP) have also suffered high double-digit loss (almost 30%) in the past one year. However, they are still trading up over 160% from the end of the third quarter of 2011, when Pershing Square first initiated a stake in the company and consequently managed to overhaul the board and replace its top management in 2012. Last year the company faced a sort of a double whammy in the form of a decline in prices of commodities and energy. Mr. Ackman highlighted in his annual letter why Pershing didn’t reduce its stake in the company when the stock was trading at higher levels by writing:

“We made a similar error in not trimming our Canadian Pacific position when it reached ~C$240 per share. While we still believed CP was trading at a discount to intrinsic value at that price and there was the potential for CP to complete an industry-transforming, value-creating merger, in light of the size of the position as a percentage of the portfolio, and concerns we had about the Chinese economy, it would have been prudent to sell a portion of our investment.”

On March 23, Archer Daniels Midland Company (NYSE:ADM) filed a suit against Canadian Pacific Railway Limited in the U.S. District Court for the Central District of Illinois, alleging that its business was hampered due to service disruptions during 2013 and 2014 at its crop-processing plants in North Dakota and Minnesota. Billionaire Jorge Paulo Lemann‘s 3G Capital initiated a stake in Canadian Pacific Railway Limited during the fourth quarter by purchasing 200,000 shares of the company.

#2 Zoetis Inc (NYSE:ZTS)

– Shares Owned by Pershing Square (as of December 31): 41.82 million

– Value of Holding (as of December 31): $2 billion

Moving on, Zoetis Inc (NYSE:ZTS) first became a part of Pershing Square’s portfolio in the third quarter of 2014, following which the fund increased its stake in the company by 651% and 1% during the next two quarters, respectively. Another hedge fund, which initiated a stake in Zoetis Inc (NYSE:ZTS) during the third quarter of 2014 was Krishen Sud‘s Sivik Global Healthcare, it owned 45,000 shares of the company going into 2016. Last year the Street was rife with rumors that Mr. Ackman is pushing for a merger deal between Valeant Pharmaceuticals Intl Inc (NYSE:VRX) and Zoetis Inc (NYSE:ZTS). However, the deal never materialized since Valeant walked away from it after having talks with Zoetis. Shares of Zoetis have fallen by over 11% so far this year and are trading in a tight range since the past two months. The company has managed to beat analysts’ earnings expectations consistently for the past nine quarters and most analysts believe that it will continue to perform well in the future. On March 15, analysts at Jefferies Group reiterated their ‘Buy’ rating on the stock, while upping their price target on it to $53 from $50.

#1 Air Products & Chemicals, Inc. (NYSE:APD)

– Shares Owned by Pershing Square (as of December 31): 20.55 million

– Value of Holding (as of December 31): $2.67 billion

Air Products & Chemicals, Inc. (NYSE:APD) was Pershing Square’s largest equity position going into 2016, accounting for over 20% of the value of its portfolio at the end of December. The fund first initiated a stake in the company during the second quarter of 2013 and since then shares of Air Products & Chemicals, Inc. (NYSE:APD) have appreciated by almost 60%. Air Products & Chemicals, Inc. (NYSE:APD) is also the only stock in this list, whose shares are trading in the green for 2016, up 10% year-to-date. The ownership of Air Products & Chemicals among hedge funds covered by us declined to 55 from 77 during the fourth quarter With a stake of 5.38 million shares of the company, billionaire Andreas Halvorsen‘s Viking Global trailed Pershing Square as the largest shareholder of Air Products & Chemicals among funds covered by us at the end of December. According to recent reports the company is in advanced talks with Germany-based Evonik Industries to sell its performance materials unit in a deal which could be valued at more than $3.5 billion.

Disclosure: None