Due to laws and regulations overseen by the Securities and Exchange Commission (SEC), large asset managers are required to publicly disclose their equity positions within 45 days of a quarter's end. For the retail investor, this is a potential gold mine of possible stock ideas.
One well-known hedge fund manager, Bill Ackman, who heads Pershing Square Capital Management, is closely watched. His track record has made him somewhat of an investing legend. He runs a concentrated book of what he and his team believe are outstanding companies.
After quickly glancing at the $10.4 billion portfolio, you'll see that there's one business that makes up more than 18% of the assets. This magnificent growth stock has soared 316% in just the past five years. Let's try and figure out what Ackman likes about this company before answering whether it makes for a worthy investment today.
Satisfying hungry shareholders
Bill Ackman's firm has owned shares in Chipotle Mexican Grill (CMG +0.93%) since the second half of 2016. This investment has clearly worked out wonderfully. Since Ackman is a student of the great Warren Buffett, I think I can identify a few key factors that he appreciates the most about this booming Tex-Mex restaurant concept.
For starters, Chipotle has been able to post healthy revenue growth over the years. This has come from a combination of same-store sales gains, as well as opening new locations across the country. Between 2018 and 2023, Chipotle's revenue jumped 102%
Adding to the company's strong fundamentals is its fantastic profitability. Last year, this business reported an operating margin of 15.8%. That's a level of financial prowess that the vast majority of companies would aspire to achieve, let alone restaurant businesses.
It's encouraging to see the margin improve over time. Even though all of Chipotle's stores are company-owned, the business has been able to better leverage its operating costs, like labor, occupancy, and administrative functions, over the past few years to rapidly grow the bottom line.
I'm sure Ackman likes how Chipotle puts its customers' needs first and foremost. It's a simple idea, but focusing on real ingredients that are freshly prepared has been the cornerstone of this company's success. What's more, that Chipotle invested so much time and lots of resources into developing its digital foundation, with its mobile app, as well as the build-out of drive-thru locations, increases accessibility and convenience for consumers.
Giving its hungry customers a top-notch value proposition has given Chipotle proven pricing power, another favorable trait about this company. Despite ongoing inflationary pressures that pushed up the costs of proteins, avocados, and paper products, Chipotle has had no issue hiking menu prices, with seemingly minimal impact to its growth trajectory.
NYSE: CMG
Key Data Points
What does the market think?
Based on the numerous positive attributes Chipotle possesses, coupled with the fact that Bill Ackman is a prominent shareholder with such a sizable chunk of his fund invested in the stock, it could be tempting for individuals to immediately add the business to their portfolios. Before doing so, it's important to figure out what the market thinks about Chipotle today.
At its current price-to-earnings (P/E) ratio of 66, the stock is extremely expensive, in my opinion. When Ackman first bought shares in the third quarter of 2016, Chipotle was in the early innings of winning over consumers following its E. coli health scare. Around that time, the stock had dropped precipitously from the summer of 2015 to the summer of 2016, which probably caught Ackman's attention.
Based on the current valuation, the market fully appreciates this company and then some. Therefore, I don't think Chipotle makes for a smart buying opportunity right now.
