Bill Ackman runs Pershing Square Capital Management. He is perhaps best known for a disastrous short position in Herbalife, a nutrition company he called a pyramid scheme. Ackman made a $1 billion bet against Herbalife in 2012, expecting the stock to go to zero, but it had doubled by the time he exited the position in 2018.

However, Ackman has made some excellent moves in the market as well. Indeed, his hedge fund returned 288% over the past five years, easily topping the S&P 500's 107% gain. That outperformance makes Ackman an investor worth studying.

With that in mind, 34% of his Pershing Square portfolio was invested in two companies as of the quarter ended last September: 17% was allocated to Alphabet (GOOGL 10.22%) (GOOG 9.96%), and another 17% was invested in Chipotle Mexican Grill (CMG 2.41%). Ackman is clearly signaling high conviction in these businesses.

Here's why both stocks could be brilliant investments.

1. Alphabet

Alphabet subsidiary Google is essentially the on-ramp to the internet. The company owns six products that reach more than 2 billion users, including the leading internet search engine (Google Search), the most popular web browser (Chrome), and the top streaming platform as measured by viewing time (YouTube). To that end, Google can engage consumers and source data from across the internet unlike any other company.

That advantage is especially formidable when coupled with its expertise in artificial intelligence and analytics. In short, Google has the web platforms, behavioral data, and technical know-how to reach consumers with relevant ads, and that has naturally translated into adtech leadership. Google captured 39% of global digital advertising revenue in 2023, according to Statista.

Meanwhile, the company has steadily gained share in cloud computing due to sensible investments in product development and go-to-market capabilities. Google Cloud Platform accounted for 11% of cloud infrastructure and platform services revenue in the third quarter, up 400 basis points in the last three years. To be clear, the company still trails Amazon and Microsoft by a wide margin, but its progress is encouraging. Moreover, Google is well positioned to continue gaining market share given its leadership in artificial intelligence infrastructure and nascent opportunities with generative AI products like Gemini.

Alphabet reported fairly good financial results in the third quarter. Revenue increased 11% year over year to $76.7 billion and GAAP net income climbed 42% to $19.7 billion. The only disappointment was a lackluster performance in Google Cloud, likely because businesses have been scrutinizing IT budgets more closely in response to economic uncertainty. But investors should look past these transient headwinds.

On that note, digital ad spending is forecast to increase by nearly 10% annually through 2032, and the cloud computing market is expected to expand by 17% annually during the same period. That gives Alphabet a good shot at annual sales growth in the low teens through the end of the decade.

In that context, its current valuation of 6.2 times sales looks reasonable, especially when the three-year average is 6.4 times sales. Patient investors can confidently buy a small position in this growth stock today.

2. Chipotle Mexican Grill

Chipotle operates more than 3,300 fast-casual dining locations. The company has a durable economic moat built on its commitment to "food with integrity." Chipotle sources only responsibly raised meats (no hormones or antibiotics) and organically grown produce, and it uses only real ingredients (no preservatives or artificial flavors).

The company is also committed to fresh ingredients. That means no freezers, no can openers, and no microwaves, according to CEO Brian Niccol. The upshot of that strategy is that many consumers view Chipotle as a healthier, tastier option than other quick-service restaurants. In turn, the company regularly generates traffic and same-store sales growth that exceed the industry average.

Chipotle reported strong financial results in the third quarter, meeting expectations on the top line while beating on the bottom line. Revenue rose 11% to $2.5 billion, driven by same-store sales growth of 5% that management attributed to more transactions and pricing power. Additionally, GAAP net income climbed 23% to $11.32 per diluted share, outpacing revenue due to stock buybacks and a 90-basis-point expansion in operating margin.

Management also provided encouraging updates on the earnings call. Niccol said staffing and turnover are back to (or better than) pre-pandemic levels, and he mentioned progress in boosting throughput, meaning lines are moving more quickly. Niccol also noted more timely and accurate digital orders. Those updates point to an improving customer experience.

Looking ahead, Chipotle plans to open 285 to 315 new restaurants this year, up from 255 to 285 last year, and the company hopes to increase its footprint by 10% in 2025. That sets the stage for solid growth in the years ahead. Indeed, the Wall Street consensus calls for earnings per share to increase by 23% annually over the next three to five years.

In that context, Chipotle's current valuation of 54 times earnings still looks a bit pricey, but investors should remember that premium gets them into a best-in-class company.