Billionaire Bill Ackman runs Pershing Square Capital Management, a hedge fund that returned 234% over the last five years, crushing the 95% total return in the S&P 500. Pershing Square also beat the benchmark index over the last year and the last decade. That outperformance makes Ackman and his fund a worthwhile case study for investors.
A closer look at the fund in the September quarter shows that Ackman had 31.4% of Pershing Square's portfolio invested in two stocks: 17.4% in Alphabet (GOOGL 10.22%) (GOOG 9.96%), split between Class A and Class C shares, and another 14% in Lowe's (LOW -0.04%). That level of investment suggests Ackman has a great deal of confidence in the ability of these two companies to create shareholder value.
Here's what investors should know about these brilliant stocks.
1. Alphabet
Alphabet reported solid results in the fourth quarter, beating estimates on the top and bottom lines. Revenue growth accelerated to 13% year over year on its strength in cloud computing, and generally accepted accounting principles (GAAP) earnings per share soared 56% due to cost control efforts and share repurchases. The stock still moved lower following the report because advertising revenue narrowly missed expectations, but Alphabet remains well-positioned to create value for shareholders.
Alphabet subsidiary Google is the largest adtech company in the world. It accounted for 39% of global digital advertising revenue in 2023, more than doubling the market share of its closest competitor, according to Statista. That dominance is a product of its ability to engage internet users and source data through some of the most prolific web properties and platforms in the world, including Google Search, YouTube, Android, and Chrome.
Google also has a reasonably strong presence in cloud computing. It accounted for 11% of global cloud infrastructure and platform services spending in the fourth quarter, up from 10% one year ago and 9% two years ago. Product innovation and improved go-to-market capabilities have been the impetus behind those share gains, and investors have good reason to think that momentum will continue. Google is a leader in artificial intelligence (AI) research and AI infrastructure, and the company is leaning into that strength.
Google recently debuted its new multimodal model Gemini, which some experts view as a better version of GPT-4 (the model that powers OpenAI's ChatGPT Plus). Google Cloud customers can use Gemini to build custom generative AI applications that span text, image, video, audio, and computer code. Additionally, the company also debuted Duet AI last year, a generative AI assistant that automates tasks across Workspace applications, such as drafting text in Google Docs and generating images in Google Slides.
Going forward, the adtech and cloud computing markets are forecast to grow 14% annually through 2030. That gives Alphabet a good shot at double-digit sales growth through the end of the decade. In that context, its current valuation of 6 times sales seems quite reasonable. Patient investors with a five-year time horizon should consider buying a small position in this growth stock today.
2. Lowe's
Lowe's reported lackluster financial results in the third quarter, missing expectations on the top and bottom lines. Revenue fell 13% year over year to $20.5 billion due to a decline in do-it-yourself (DIY) consumer spending, offset by a slight increase in professional same-store sales. Meanwhile, non-GAAP net income declined 6% to $3.06 per diluted share.
But Lowe's is well positioned to reaccelerate growth in the future. Housing stock across the U.S. is both limited and aging, and the company should capitalize on those tailwinds as it leans into its Total Home strategy. In addition, Lowe's is part of an elite group of stocks known as Dividend Kings.
In 2020, Lowe's outlined a Total Home strategy that aims to position the company as a comprehensive provider of all things home improvement. The strategy centers on five initiatives:
- Driving penetration with professionals
- Accelerating online sales
- Expanding installation services
- Improving localization through logistics
- Elevating product assortment
Ultimately, the goals are margin expansion and market share gains.
Lowe's is making progress on those goals despite a challenging economic environment. For instance, Morgan Stanley believes Home Depot saw a decline in professional same-store sales during the third quarter, but Lowe's reported growth, hinting at market share gains. Additionally, its adjusted operating margin was 13.2% in the third quarter, about 600 basis points higher than when the company announced its Total Home strategy. Management sees that figure reaching 14.5% in the next two to four years.
Lowe's benefits from substantial brand authority, as evidenced by its position as the second-largest home improvement retailer, and CEO Marvin Ellison was recently recognized by Barron's as one of the top 25 CEOs of 2023. In short, the company has an effective growth strategy, a strong market presence, and good leadership. That winning combination should help Lowe's gain share in the fragmented $1 trillion home improvement market in the future.
Wall Street expects Lowe's to grow earnings at 5.5% annually over the next three to five years, but that figure could trend upward as economic conditions improve. That said, the current consensus estimate makes the present valuation of 16.8 times earnings look expensive. Investors intent on beating the market may want to wait for a cheaper entry point, but investors willing to trade market-beating returns for a reliable dividend should consider buying a small position today.
