Although trying to front-run Bill Ackman’s next investment is likely not the wisest strategy, Ackman’s criteria is enough to generate some interesting investment ideas.
Ackman’s hints
Ackman’s target sounds like a company Warren Buffett would covet.
According to a Bloomberg report, it’s a large American company with a simple and predictable business. It has high barriers to entry, is free cash flow generative, its customers have relatively high switching costs, and the stock trades at a discount to its competition.
Moreover, based on the fact that Ackman is looking to commit about $3 billion worth of capital, it can be inferred that the company has a market capitalization of no more than $60 billion.
FedEx Corporation (NYSE:FDX) trades at a discount to UPS
Shares of FedEx Corporation (NYSE:FDX) surged on Tuesday, as market participants speculated that FedEx Corporation (NYSE:FDX) could be Ackman’s target.
In many ways, the company fits the bill. Its market cap is about $32 billion — $3 billion would net Ackman a little less than 10% of the company, enough to stir things up. It’s profitable, and operates in an industry with high barriers to entry. At the same time, contractual agreements give its big business customers switching costs.
It trades at a discount to its chief rival, United Parcel Service, Inc. (NYSE:UPS), whose stock has outperformed FedEx significantly in recent years.
FedEx Corporation (NYSE:FDX)’s business is far from simple, although the corporation as a whole is dedicated to one-end: delivering packages.
JPMorgan downgraded the stock in June. Analysts at the bank noted that the company’s network is orientated towards speedy, costly delivery — the market is increasingly favoring the cheaper, slower option.
If Ackman does buy a stake, perhaps he could pressure management to be more aggressive in its efforts to transition the company.
ADT Corp (NYSE:ADT) is a simple company
Like FedEx, shares of ADT Corp (NYSE:ADT) also popped on Tuesday amid rumors Ackman could be interested in the home security firm.
ADT Corp (NYSE:ADT) fits many of Ackman’s stated criteria, although to a lesser extent than FedEx. ADT has no major publicly-traded competitors (it lists a variety of private competitors on its 10-K), so it’s hard to see how Ackman would conclude that it trades at a discount to its competition.
Nevertheless, ADT Corp (NYSE:ADT)’s business is fairly simple and straightforward. It’s a profitable company, and once its home security system is installed, it’s difficult for its subscribers to switch.
ADT Corp (NYSE:ADT)’s market cap is under $10 billion, so with a $3 billion investment, Ackman could have a lot of leeway in reshaping the company.
