Bill Ackman is one of the most widely followed billionaire investment managers, with 1.2 million followers on X. His following is based on a successful career as a rising star on Wall Street in the 1990s before starting his current firm Pershing Square Capital Management in 2004. Ackman's net worth is currently estimated at more than $4 billion, according to Forbes.
Pershing Square Capital Management makes long-term investments in companies when their share prices are trading below their estimated worth. From 2004 through 2023, Pershing Square generated a 16.5% annualized return, significantly outpacing the S&P 500's 10% annualized return.
Three of Pershing Square's top holdings are Alphabet (GOOG 1.06%) (GOOGL 1.08%), Universal Music Group (UMGN.F 0.45%), and Chipotle Mexican Grill (CMG 2.15%). Let's dig into Ackman's reasons for sticking with these stocks and whether investors can still expect market-beating returns from here.
1. Alphabet (Google)
At the end of 2023, Pershing Square held a sizable stake in Google owner Alphabet, totaling 14% of Pershing Square's net assets.
Google Search holds a dominant position in the online advertising market. Ackman first bought the stock earlier in 2023 after the share price collapsed to a lower valuation during what turned out to be another cyclical downswing in the ad market. Even though the stock is not as cheap as it was a year ago, Ackman continues to hold a large stake, true to his firm's strategy to invest in companies that can produce attractive returns over at least a decade.
Alphabet's revenue grew 15% year over year in Q1, as it rolled out new AI-based solutions for advertisers over the last year. This growth shows the company's ability to continue soaking up the lion's share of online ad spending thanks to its large base of users that use Search everyday. Google's leading position in digital advertising should only strengthen as it invests in artificial intelligence (AI)-based solutions for advertisers.
The advancements Google is making in its Gemini AI model will ultimately make its various services, including Gmail and Search, even more valuable to users. For instance, subscribers to Google One's premium plan lets users take advantage of Gemini AI in Gmail and other apps. Google One already has more than 100 million subscribers and is becoming a significant growth catalyst.
It's for these reasons the stock is still a great buy. Its forward price-to-earnings ratio of 22 looks very attractive against Wall Street's long-term projected earnings growth of 19% for the underlying business.
2. Universal Music Group
Universal Music Group was Pershing Square's largest investment, comprising nearly 25% of the firm's net assets. Obviously, a bet that big by a multi-billion dollar investment firm reflects extremely high confidence in the stock's ability to deliver market-beating returns.
Universal is one of the big three music labels, along with Sony Music and Warner Music. The music labels are enjoying prosperity from the industry's shift to digital distribution and streaming. This is because streaming services like Spotify need to pay fees to the music labels for the right to deliver music to their customers, and that is boosting Universal's bottom line and stock price.
Universal's recurring revenue from music consumption and the fees it collects from digital streaming platforms lends to a fairly safe and highly profitable business. These qualities explain why the stock has earned such a large position for Pershing Square's investment portfolio. Universal's free cash flow has doubled since 2020, thanks to double-digit annualized growth in revenue.
Another important reason to like Universal's prospects is that music is significantly under-monetized compared to other entertainment outlets. JP Morgan Research found that inflation-adjusted recorded music revenue per capita was $81 in 1999 but had fallen to just $37 in 2020. Streaming has driven down the cost of music consumption, but this also means the big music labels have untapped opportunities for growth.
Pershing Square believes Universal has a great opportunity to offer targeted products and services that can tap into fans' passion for their favorite artists. This could go a long way to driving higher revenue and profit over time.
Investors have high growth expectations for Universal. The stock trades at 33 times trailing free cash flow. But that seems a fair valuation for a business with recurring and highly profitable, growing revenue streams.
3. Chipotle Mexican Grill
Pershing Square has held a position in Chipotle Mexican Grill, a superstar performer in the restaurant industry, since 2016. The stock delivered a cumulative return of 737% over the last seven years, and the fact that Ackman continues hold a large position indicates a rewarding future still awaits shareholders.
Chipotle was one of Pershing Square's largest holdings at the end of 2023, totaling 13.7% of the firm's net assets. Ackman likes the company's extremely profitable restaurant model that operates on speed and efficient service, while offering a quality menu that delivers value to the customer. This model still has great potential to deliver returns to investors.
Indeed, Chipotle believes it can more than double its North American store base to more than 7,000, implying annual growth in the store footprint of 8% to 10% per year.
Chipotle stock is priced for growth, trading at a rich forward P/E, but the company is backing it up with stellar operating results. The company's sales grew 14% year over year in the first quarter, with adjusted earnings up 27%.
The Wall Street consensus projects earnings growing at an annualized rate of 20% over the long term. It could certainly achieve market-beating returns for shareholders, especially if it successfully replicates its store model internationally and grows into a global restaurant chain.
