Pershing Square, managed by Bill Ackman, is a value investor with a long-term view which invests in stocks that it believes have departed from their fundamental value, including in special situations. The fund invests in a small number of positions relative to other hedge funds, particularly relative to other hedge funds its size, so a big loss in one position is not easily offset by gains elsewhere in the portfolio. We have already looked at Pershing Square’s 13F for the second quarter of the year and covered some of Ackman’s thinking (read more about Ackman’s portfolio), and now will investigate the three stocks that the fund sold out of completely during the second quarter.
Pershing Square had reported 15.5 million shares of Kraft (NASDAQ:KFT) at the end of March, but sold all of those shares by the end of June. Kraft’s generally lower-priced food products may have been a play by the fund on low consumer spending (the stock’s beta is 0.3, indicating that Kraft’s business prospects have little dependence on the national economy). The stock is up about 11% this year, though much of that gain has come since the beginning of July; with the current price above where it was at any point during the second quarter, Ackman and his team thought it was not a good value at lower prices than where it is currently trading. The trailing price-to-earnings multiple is 21. On a forward basis, analysts expect high growth over the next year and the P/E multiple to 15, but given the company’s recent performance (a slight dip in revenue and 5% gain in earnings in its most recent quarter compared to a year ago) we are skeptical of the sell-side’s expectation of an 11% increase in earnings per share next year compared to 2012. We think the stock may be overpriced, and it is certainly not cheap.
Another exit took place at Fortune Brands Home & Security (NYSE:FBHS); Pershing Square had reported a position of 13.3 million shares at the end of the first quarter after getting heavily into the stock as a spinout (read more about why hedge funds like spinouts) from parent Fortune Brands and presenting the stock at last year’s Value Investing Congress. The $4 billion market cap is tied to home repair, remodeling, and construction through is cabinetry, plumbing, and window and door products while its security business owns the Master Lock brand. Pershing Square got into the stock in hopes of a housing recovery, and it had risen nicely since the fund’s presentation. However, earnings growth is in the single digits, the forward P/E is 22, and the market is generally more bullish on housing than it was last fall- which may mean that an investment in the company is running low on upside. Of course, it’s also easy to imagine Ackman looking at his portfolio at the end of April, seeing that Fortune Brands Home & Security was at that time up 35% on the year, and deciding to get out.
Finally, Pershing Square exited a smaller investment in Family Dollar Stores (NYSE:FDO) after having cut its stake by about 70% during the first quarter to 2.6 million shares. Family Dollar is another stock that investor sentiment seized on last year due to its low pricing in an environment that analysts generally believed was unfavorable to consumer spending. The stock rose 10% in the second half of 2011 as the S&P 500 fell about 5%. Family Dollar still trades at reasonable value levels- a trailing P/E of 18 and a forward multiple of 15- but the fund apparently did not think it was underpriced anymore and that better investment opportunities were available.
We think that Fortune Brands has risen in price to the level where the combination of its valuation multiples and risk exposure aren’t a good fit for a long-term portfolio. Family Dollar has been growing nicely, but the stock has probably gotten to the point where Wal-Mart (NYSE:WMT) is at least as good a pick. And, as we’ve noted, the sell-side may be setting Kraft on too high a track. We think Pershing Square made a good choice by closing that position as well.