We recently shared Pershing Square’s Q1 2019 Investor Letter, in which the fund reported a 36.9% increase of NAV per share during the first three months of 2019. If you are interested in more details you can track down a copy of the letter here. In the letter, the fund also shared its opinion on the stocks in its equity portfolio, including Chipotle Mexican Grill, Inc. (NYSE:CMG), for which it said it believes is yet to deliver strong profits and to grow its sales in the upcoming years.
“Chipotle Mexican Grill (“CMG”)
CMG’s first quarter results continued to demonstrate the significant progress that CEO Brian Niccol and his team have made in dramatically improving performance and positioning the company for long-term sustainable growth. Same-store sales grew 10% in the quarter led by transaction growth of approximately 6%, a significant acceleration in sequential growth – better than that of any other large publicly traded restaurant company.
Management raised its full year same-store sales guidance to mid-to-high single-digit growth from mid-single-digit growth. Digital sales doubled from the prior year quarter to nearly 16% of sales, including robust growth in delivery, which has driven incremental sales and improved margins. Key drivers for continued same-store sales progress in the coming quarters include the new loyalty program launched in March, the completion of the rollout of the digitized second make line by the end of 2019 from half to all stores, and a continued focus on improving speed of service and store employee retention.
Restaurant margins expanded 150 basis points in the quarter to 21%, the highest since 2015. Management estimates that every $100,000 increase in average restaurant sales should translate into a one percentage point increase in restaurant margins, implying margins of 25% once Chipotle gets back to peak average restaurant sales of $2.5 million, which were previously achieved with essentially no contribution from digital or delivery.
Chipotle’s store count exceeded 2,500 stores in the quarter, with management reiterating the opportunity for up to 5,000 stores on the earnings call, and Brian citing the potential for up to 7,000 stores in a recent interview. Despite the 63% year-to-date increase in the share price, we believe that Chipotle is in the early innings of its transformation, and that its robust pipeline of initiatives in the stage gate process, accelerated footprint expansion, and a world-class management team should drive superlative growth in sales and profits for years to come.”
Susan Law Cain / Shutterstock.com
Chipotle Mexican Grill is a chain of fast- casual restaurants that provides its professional services not only in the US, but also across the United Kingdom, France, Canada, and Germany. It gained wide popularity mainly thanks to its Mission-style burritos and tasteful tacos. Since the beginning of the year, Chipotle’s stock gained 49.44%, and on May 24th it had a closing price of $662.56. Chipotle Mexican Grill has a market cap of $18.36 billion while trading at a price-to-earnings ratio of 90.55
At Q4’s end, a total of 38 of the hedge funds tracked by Insider Monkey were bullish on this stock, a change of 15% from the second quarter of 2018. Below, you can check out the change in hedge fund sentiment towards CMG over the last 14 quarters. With hedgies’ positions undergoing their usual ebb and flow, there exists a few notable hedge fund managers who were boosting their stakes meaningfully (or already accumulated large positions).
Among these funds, Pershing Square actually held the most valuable stake in Chipotle Mexican Grill, Inc. (NYSE:CMG), which was worth $838 million at the end of the third quarter. On the second spot was Renaissance Technologies which amassed $535.6 million worth of shares. Moreover, Citadel Investment Group, AQR Capital Management, and Generation Investment Management were also bullish on Chipotle Mexican Grill, Inc. (NYSE:CMG), allocating a large percentage of their portfolios to this stock.
Warren Buffett never mentions this but he is one of the first hedge fund managers who unlocked the secrets of successful stock market investing. He launched his hedge fund in 1956 with $105,100 in seed capital. Back then they weren’t called hedge funds, they were called “partnerships”. Warren Buffett took 25% of all returns in excess of 6 percent.
For example S&P 500 Index returned 43.4% in 1958. If Warren Buffett’s hedge fund didn’t generate any outperformance (i.e. secretly invested like a closet index fund), Warren Buffett would have pocketed a quarter of the 37.4% excess return. That would have been 9.35% in hedge fund “fees”.
Actually Warren Buffett failed to beat the S&P 500 Index in 1958, returned only 40.9% and pocketed 8.7 percentage of it as “fees”. His investors didn’t mind that he underperformed the market in 1958 because he beat the market by a large margin in 1957. That year Buffett’s hedge fund returned 10.4% and Buffett took only 1.1 percentage points of that as “fees”. S&P 500 Index lost 10.8% in 1957, so Buffett’s investors actually thrilled to beat the market by 20.1 percentage points in 1957.
Between 1957 and 1966 Warren Buffett’s hedge fund returned 23.5% annually after deducting Warren Buffett’s 5.5 percentage point annual fees. S&P 500 Index generated an average annual compounded return of only 9.2% during the same 10-year period. An investor who invested $10,000 in Warren Buffett’s hedge fund at the beginning of 1957 saw his capital turn into $103,000 before fees and $64,100 after fees (this means Warren Buffett made more than $36,000 in fees from this investor).
As you can guess, Warren Buffett’s #1 wealth building strategy is to generate high returns in the 20% to 30% range.
We see several investors trying to strike it rich in options market by risking their entire savings. You can get rich by returning 20% per year and compounding that for several years. Warren Buffett has been investing and compounding for at least 65 years.
So, how did Warren Buffett manage to generate high returns and beat the market?
In a free sample issue of our monthly newsletter we analyzed Warren Buffett’s stock picks covering the 1999-2017 period and identified the best performing stocks in Warren Buffett’s portfolio. This is basically a recipe to generate better returns than Warren Buffett is achieving himself.
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