Bill Ackman is the billionaire hedge fund manager behind Pershing Square Holdings. He has been crushing the market for years. For instance, since 2019, his portfolio has tripled in value.
Ackman doesn't diversify his portfolio for the sake of diversification. When he likes a stock, he goes all in. Right now, he has more than 15% of his portfolio invested in a single company. He has owned this stock for years, and it's fair to say he thinks it has plenty of upside from here.
Bill Ackman loves this complicated $3.5 billion stock
Howard Hughes Holdings (HHH 1.83%) has a weird history. Nearly 15 years ago, it was spun off from General Growth Properties, which was later acquired by Brookfield Property Partners. Howard Hughes Holdings, then known as Howard Hughes Corporation, held a strange portfolio of properties that General Growth Properties believed weren't being valued fairly by the market. The company, for example, owned commercial real estate in New York City, a collection of master-planned communities in the western and southern U.S., and the air rights -- otherwise known as the right to build -- above a famous property in Las Vegas.
It turns out that the market really didn't understand how to value the company's assets. When the company went public, the shares were valued below book value. That meant that the market didn't even believe the assets to be worth the value listed in the financial statements.
Over a period of years, the market reversed course, at times valuing the company at more than 2.5 times book value. Since those peaks in 2014 and 2015, however, the valuation has continued to fall, nosediving in early 2020 due to fears that the pandemic would crush stocks exposed to office and commercial real estate.
Howard Hughes still owns a strange mix of assets, but very recently, the company announced plans to streamline its business. Now trading at just 1.15 times book value, with a market cap of $3.5 billion, this looks like a great time to follow Ackman into a cheap business with promising turnaround potential.
HHH Price to Book Value data by YCharts
If you're patient, now is the time to buy Howard Hughes
Ackman has held Howard Hughes stock since 2010, the year it split from General Growth Properties. For much of that time, he served as the company's chairman. In early April, however, he signaled that he would relinquish this role, handing it off to Scot Sellers, the former chief executive officer of Archstone, a real estate investment trust (REIT) with a market cap of $22 billion, nearly seven times larger than Howard Hughes's current valuation.
Don't make the mistake of thinking Ackman has soured on his investment. Last quarter, he boosted his position in Howard Hughes, bringing his stake up to nearly 19 million shares. Ackman is handing over the reins because Howard Hughes is embarking on a turnaround effort that could see its valuation improve considerably over the coming years.
Last October, Howard Hughes revealed that it would be spinning off several non-core assets, including the company's South Street Seaport in Lower Manhattan, the Las Vegas Aviators minor league baseball team, a majority stake in its air rights above the Fashion Show Mall in Las Vegas, and its 25% stake in Jean-Georges Restaurants. Cobbling together disparate assets like this is hard for the market to value accordingly -- the same reason Howard Hughes was originally split off from General Growth Properties.
What will Howard Hughes be left with? Mainly a portfolio of master-planned communities in growing areas in Arizona, Nevada, Hawaii, and Texas. These are essentially one-stop shops for real estate developments. From the ground up, the company designs, builds, and operates communities with housing, office space, commercial real estate, schools, hospitals, parks, and more. They're a viable solution to the growing demand for housing.
The company is able to pursue such a vision because it owns a huge amount of land. Since 2017, it has sold around $2 billion of its land portfolio, yet the value of this portfolio is higher than it was before the sales due to rising land prices.
Whether it's through rising land prices or by unlocking the value of that land by developing master-planned communities, Howard Hughes has plenty of ways to win long-term. After the spinoff of its non-core assets, the company will become the only publicly traded, pure-play master-planned community stock.
Historically, Howard Hughes's master-planned community assets have achieved returns on equity of about 18% per year. That should garner a price-to-book multiple well above 1.15, but it will take time for this value to be realized. Ackman looks prepared to be patient with his 15% stake. Following his lead looks promising; just make sure you're in it for the long haul.
