Known for his activism and long term views, Bill Ackman‘s Pershing Square is one of the best hedge funds in the world. In the first 11 months of 2015, Pershing Square Holdings lost around 21% net of all fees and since inception at the end of 2012, it is up by 21.8%, according to its last investor letter. Given Pershing Square’s widely followed status and Ackman’s investing acumen, let’s take a look at how Ackman’s top picks, which include Valeant Pharmaceuticals Intl Inc (NYSE:VRX), Air Products & Chemicals, Inc. (NYSE:APD), Canadian Pacific Railway Limited (USA) (NYSE:CP), Mondelez International Inc (NASDAQ:MDLZ), and Zoetis Inc (NYSE:ZTS), performed in the fourth quarter.
Why do we track 13F filings of hedge funds and other institutional investors? The reason is simple: we analyze the equity portfolios of these funds and identify trading opportunities. However, we mainly focus on their small-cap picks, which, as we have determined, can provide the highest returns. According to our backtests covering the period between 1999 and 2012, the 15 most popular stocks among hedge funds generated around 81 basis points of alpha per month on average (see the details here).
#5 Zoetis Inc (NYSE:ZTS)
Shares held (as of September 30): 41.82 million
Total Value (as of September 30): $1.72 billion
Percent of Portfolio (as of September 30): 12.35%
Zoetis Inc (NYSE:ZTS)’s stock gained 16.37% in the quarter, making the animal health drug company the best performer of Ackman’s top five picks. Animal health is a growing area, with the global animal health market expected to grow to over $33 billion by 2020 from the current $23 billion now. It’s also a pretty stable market, as demand for meat and milk and the drugs required to supply the meat is pretty inelastic. The demand for pet health products will only grow as more emerging market citizens discover the joys of owning a pet. Because of cost cutting, Zoetis’ margins are creeping higher, and the company has beaten analyst earnings expectations every quarter last year. Zoetis is also expanding, having recently completed a $765 million acquisition of Pharmaq, a maker of farmed fish vaccines and drugs.
In his last investor letter, Ackman said:
“Aquaculture is the fastest growing segment of the global animal health industry and is the only segment in which Zoetis had limited presence. The PHARMAQ acquisition provides a market-leading portfolio of vaccines and pharmaceuticals for farmed fish as well as a late-stage development pipeline anticipated to deliver important new vaccines and next-generation parasiticides in the near term. PHARMAQ 10 is a good strategic fit with Zoetis, and provides another pillar for long-term growth. The company believes this acquisition will enjoy a long period of sustainable growth in revenue, profits, and cash flow when added into its business.”
Ackman isn’t the only fund with substantial holdings in Zoetis. A total of 60 funds from our database owned about 20.8% of the company at the end of September, including Cliff Asness’ AQR Capital Management and Barry Rosenstein’s JANA Partners.