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

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).

Bill Ackman, is HLF a good stock to buy, Herbalife, Jim Cramer, Pershing Square

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).

Bill Ackman
Pershing Square

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.

Next is chemical producer Platform Specialty Products Corp (NYSE:PAH), in which Ackman holds a stake of 42.74 million shares with a value of $1.10 billion as of March 31. The sunshine-state-based company has been having an impressive year on the stock exchange, returning 18.00% year-to-date and lifting it above the $5.00 billion small-cap threshold. The performance may be due in part to the company closing its deal to acquire Arysta LifeScience Limited, a new unit that PSP CEO Mr. Daniel H. Leever says will be integrated into his company’s operations, creating valuable synergies for the business. The results for the first quarter however failed to meet analysts’ expectations, with reported earnings per share of $0.21 falling $0.01 short. Another hedge fund with a stake in Platform Specialty Products Corp (NYSE:PAH) is John Griffin‘s Blue Ridge Capital, owning 11.00 million shares with a value of $282.26 million.

The last smaller-cap pick of Ackman is in real estate corporation Howard Hughes Corp (NYSE:HHC), which has also had a strong 2015 performance, returning 11.00% year-to-date. Ackman held a stake of 3.57 million shares with a value of $553.11 million, a stake that was unchanged during the first quarter. The Texas-based HHC operates real estate in 16 states and has been showing a strong shift from sales to income during the first quarter of 2015, mainly driven by its income producing assets. New openings in 2014 like the Outlet Collection at Riverwalk helped to boost the company’s first quarter results, strengthening its leasing income. The expansion is continuing this year as well in an attempt to further increase that income. However, the decline in oil prices, which has hit the energy hub of Houston hard, is potentially worrisome. A slowdown in Houston’s economy would impact Howard Hughes Corp (NYSE:HHC), with the company saying that major layoffs in the Houston area would harm its planned communities in the area. On the other hand, the firm’s prestigious project on the New York Seaport has seemingly come a little closer to fruition after a deal with privately-held Edison Properties was struck this April, giving HHC important building rights in the area. A major stake in Howard Hughes Corp (NYSE:HHC), although decreased by 7% during the first quarter, was kept by Horizon Asset Management, managed by Murray Stahl. After the decrease, the fund held 4.82 million shares with a value of $747.57 million.

Disclosure: None

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