When it comes to hedge fund managers, Bill Ackman is in a class by himself. He etched his name into Wall Street history by going against hedge fund norms, acquiring significant stakes in just a few companies, and holding them for the long term. Furthermore, as a well-known activist investor, those stakes sometimes involve troubled businesses and he pressures management to make changes that positively impact shareholder value.
Ackman heads up Pershing Square Capital Management, the hedge fund he founded, which has more than $11.3 billion in assets under management. Pershing typically holds between eight and 12 large-cap North American companies. To make the cut they must be high quality, have limited downside, and generate predictable, recurring cash flows. This playbook has been extremely successful for Ackman as Pershing Square has returned 31% annualized over the past five years, nearly twice the returns of the S&P 500.
To close out 2023, Pershing Square held stakes in just eight stocks, but one stands head and shoulders above the rest.
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Let the "chips" fall where they may
By far, the largest holding in Pershing Square's portfolio is Chipotle Mexican Grill (CMG 0.17%). Ackman has amassed nearly 825,000 shares currently worth more than $2.6 billion, making up a massive 23% of his portfolio.
Not only is Chipotle one of the most well-known companies in the world, but it's also among the most successful. Since the company's debut in 2006, the stock surged from just $22 to roughly $3,200 as of this writing, generating returns of 14,441%.
In late March, Chipotle announced that its board of directors had approved a 50-for-1 stock split, making it "one of the biggest stock splits in New York Stock Exchange (NYSE) history." The split will require the approval of shareholders when Chipotle conducts its annual meeting on June 6. If the measure is approved, and there's no reason to believe otherwise, each shareholder of record will receive 49 additional shares for every one they hold after the market close on June 25.
For context, instead of owing one share worth $3,200, investors will own 50 shares worth $64 each.
Why Ackman singled out Chipotle
Ackman has chosen just eight stocks to make up Pershing Square's $11 billion portfolio, so it's already a rare company that makes the cut. He first added shares of Chipotle in 2016 after the fast-casual pioneer suffered from a rash of food safety issues that sent diners and investors alike packing, and the stock price was cut in half.
Yet, where some investors saw risk, Ackman saw opportunity -- partially thanks to his long-term outlook. Pershing Square's most recent annual report cited Chipotle's "continued focus on exceptional food and operational excellence" as the catalyst for its robust growth. The report also noted Chipotle's "industry-leading same-store sales growth and profitability."
Ackman is clearly on to something. In the first quarter -- even as rivals dealt with headwinds -- Chipotle's revenue increased 14% to $2.7 billion, driven higher by comparable restaurant sales that jumped 7%. The company's operating margin and restaurant-level operating margin both edged higher thanks to Chipotle's fiscal discipline. Perhaps more impressive was the company's profits, as adjusted earnings per share (EPS) jumped 27% to $13.37.
NYSE: CMG
Key Data Points
Chipotle "has a long runway for robust growth," according to Ackman. He cites the company's ability to consistently improve same-store sales and profitability, which is clear from its recent results. He also points to as-yet untapped growth in North America, given Chipotle's plans to increase its location county by 8% to 10% annually. That's not to mention the ongoing international expansion, which includes growth across Europe and a recently inked franchise agreement to expand into the Middle East.
Finally, in its annual report, Pershing called out the success of CEO Brian Niccol, writing, "Chipotle stock is up more than 10-fold since Brian became CEO in March 2018. What more can we say?" High praise indeed, coming from one of the world's most successful hedge funds.
Is Chipotle stock a buy now?
Chipotle has already notched impressive gains thus far in 2024, with the stock up 40% year to date (as of this writing), on top of 65% gains last year. As a result, the stock is somewhat pricey, currently selling for 58 times forward earnings and nearly 7 times forward sales. A valuation of that magnitude suggests investors have high expectations built into the stock price. If Chipotle fails to live up to those expectations, the stock could fall.
That said, for investors with a long investing time horizon, Chipotle still bears all the attributes of a long-term winner. Given the company's track record of performance and its ongoing expansion opportunities, the evidence suggests that five to 10 years from now, we could be having this discussion about Chipotle's merits again.
For investors that simply can't stomach buying the stock at its current multiple, add it to your watch list and buy on any weakness.
