Can Bill Ackman’s Smaller-Cap Picks Beat The Market? History Says No

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Pershing Square, led by Harvard graduate and philanthropist Mr. Bill Ackman, is a New York-based hedge fund founded in 2004 with a long-term, activist investing approach. Ackman, famous for his involvement in the spin-off of the Tim Horton’s doughnut chain from The Wendy’s Company (NASDAQ:WEN) in 2005, and for his current, long-running short of Herbalife Ltd. (NYSE:HLF), has an estimated real-time net worth of $2.5 billion according to Forbes. Pershing Square’s 13F filing for the first quarter of 2015 revealed that it was 46% invested in healthcare in terms of its public equity portfolio, 31% in materials and 19% in transports. While Ackman’s top picks are all in large-caps, he does have noteworthy investments in a number of smaller-cap companies, including Restaurant Brands International Inc (NYSE:QSR), Platform Specialty Products Corp (NYSE:PAH), and Howard Hughes Corp (NYSE:HHC).

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These picks are particularly noteworthy to us given our research that shows the best small-cap picks of hedge funds historically outperform the market quite easily and are far more successful than their best large-cap picks, which they tend to sink most of their money into. However, our backtests of Ackman’s public equity portfolio between 2006 and 2012 show his smaller-cap (market caps of under $10 billion) stock picks actually underperformed the market during this time, returning an average of 0.39% per month compared to the S&P 500’s average monthly gains of 0.45%. On the other hand, his stock picks in companies above the $10 billion threshold returned a strong 1.04% monthly during the same period. Ackman is the rare investor who gets it right and has the majority of his investors’ capital sunk into his best performing picks, which is why his returns have been so good. Unfortunately, most other investors are better at generating returns from small-cap picks, yet have the majority of their capital sunk into large-caps. We built our Insider Monkey small-cap strategy to get around this inherent hedge fund problem. Instead of betting on a mish-mash of stocks, some good, some bad, and paying high fees to do so, investors can instead bet on only the best stock picks of the best money managers in the world. The results of our system speak for themselves: over 142% returns since the end of August 2012, nearly 2.5 times greater than the returns of the S&P 500 during that time (read more details).

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Let’s take a look at Ackman’s top smaller-cap stock picks now, beginning with Canadian fast-food restaurant company Restaurant Brands International Inc (NYSE:QSR), which runs the well-known Burger King and Tim Hortons brands. Ackman’s stake consists of 38.00 million shares with a value of $1.46 billion as of March 31. The earnings for the company’s first quarter were posted on April 27, beating analysts’ expectations with earnings per share of $0.16, a $0.02 outperformance. The expectations for the company’s fiscal second quarter ending June 30 are now $0.25 per share based on the consensus of five analysts, who have a target price for the stock of $43.60, 15.1% upside above its closing price on June 9. Kenneth Mario Garschina‘s Mason Capital Management was also hungry for Restaurant Brands International Inc (NYSE:QSR)’s shares, increasing its stake by 19% to 4.30 million shares during the first quarter. Shares of Restaurant Brands have endured a volatile 2015 thus far and are currently down by 3% year-to-date.

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