Bill Ackman is one of the best-known billionaire investors in the world. Despite his star power, he failed to launch a publicly traded investment fund last month, as demand fell short of expectations.
Ackman planned to launch a closed-end fund called Pershing Square USA, which would have put him in charge of investing billions of investors’ dollars. While he originally planned to raise $25 billion for the fund, he significantly lowered the amount before scrapping it altogether as demand failed to materialize.
But investors interested in following Ackman’s investment style can still track his Pershing Square Capital Management hedge fund. Ackman discloses his portfolio holdings quarterly with the SEC, and it’s typically highly concentrated. Currently, he has about 60% of the portfolio invested in just three companies’ stocks.
1. Alphabet (22.1%)
Ackman’s biggest holding based on Pershing Square’s first-quarter disclosure is Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL). He holds about $700 million of the class A shares and over $1.5 billion of the class C shares.
Ackman bought shares of Alphabet when many investors were concerned how AI will impact its core Google business. It turns out AI is very good for Alphabet’s business.
Artificial intelligence is responsible for pushing Google Cloud to a $10 billion quarterly revenue run rate, and its revenue growth is accelerating. Several big-name AI companies are using Google Cloud to train and deploy their AI models and services.
Meanwhile, core Search ad revenue appears unaffected so far by chatbots like OpenAI’s ChatGPT. Revenue increased 14% in Alphabet’s most recent quarter for its main product. That said, it saw some weakness in YouTube ad revenue growth.
While Google continues to invest heavily in its data centers to build AI-training and inference capacity, it’s cutting costs elsewhere in the company. As a result, operating margin is expanding quickly, helping grow the bottom line. Analysts currently expect Alphabet to produce earnings per share growth exceeding 20% per year for the next five years. Meanwhile, the stock trades at just over 20 times forward earnings estimates, making it a very enticing stock right now.
2. Chipotle Mexican Grill (19.5%)
Ackman initially invested in Chipotle Mexican Grill (NYSE: CMG) in 2016 following food safety concerns, which left many customers seeking alternatives. Ackman liked the strong brand and leadership of the business and saw an opportunity to buy shares. While it took some time to turn around, the investment has since produced strong market-beating returns for Pershing Square.
Chipotle has defied the rest of the restaurant industry lately. Same-store sales increased 11% in its most recent quarter, driven by both transaction volume and average sales. Chipotle continues to open new stores, adding 52 new restaurants last quarter. As a result, total revenue growth exceeded 18%.
What’s more, it’s managing costs and expanding its operating margin. Restaurant-level operating margin climbed to 28.9% last quarter, up 140 basis points year over year. That number should continue to climb as same-store sales remain strong. As a result, Chipotle should produce strong bottom-line growth.
While the business remains strong, the stock price certainly reflects it. Shares trade for about 48 times forward earnings estimates. Investors may be better off waiting for a pullback in the share price before adding the stock to their portfolio.
3. Hilton Worldwide (18.6%)
Hilton (NYSE: HLT) is one of the biggest hoteliers in the world with a portfolio of 24 brands and over 7,600 hotels. Ackman has followed the company for a long time, briefly accumulating shares in 2016. It wasn’t until late 2018 when he was able to establish a much larger position amid the market downturn.
Hilton’s scale gives it several advantages. It has a massive loyalty program and it invests a lot of money in marketing it and providing benefits to its customers. With nearly 190 million members, that makes the Hilton program extremely attractive for hotel owners, giving Hilton more money to invest in loyalty. This network effect creates a moat around its business.
Hilton has expanded its portfolio significantly over the last few years and emerged quite strong from the pandemic slowdown in travel. Revenue continues to grow in 2024, with revenue per available room expected to climb between 2% and 4%. And as Hilton continues to add more rooms, that should translate to double-digit revenue growth overall.
Despite the strong operational success in recent years, Hilton’s stock price may have gotten ahead of itself. Shares currently trade for around 29 times forward earnings. Hilton’s enterprise value is about 18 times management’s adjusted EBITDA outlook for the year. Both valuations are relatively high. And while Hilton might deserve a premium valuation, investors may be best off looking elsewhere first.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Chipotle Mexican Grill. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
Billionaire Bill Ackman Has 60% of His Hedge Fund’s $10 Billion Portfolio in Just 3 Stocks was originally published by The Motley Fool
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