Chipotle Mexican Grill (CMG +0.00%) has long been a primary holding of Pershing Square Capital Management, the fund managed by billionaire Bill Ackman. His fund first bought the stock during the second half of 2016, and it has earned considerable returns since that time.
In total, Pershing Square has purchased 2.9 million shares worth approximately $1.1 billion. However, close to 2.2 million shares were sold in subsequent quarters, bringing in estimated gross proceeds of $1.9 billion. This leaves the fund with around 744,000 Chipotle shares worth more than $2.3 billion.
In addition to those massive returns, such successes can yield valuable investment lessons. Here are three that may help investors follow Ackman's lead and earn comparable returns with their own investments.
1. Be visionary
A visionary viewpoint does not necessarily mean one sees the future at a specific level or foresees unusual occurrences. Still, it requires a perspective of seeing where a company like Chipotle could go based on its past and that of comparable enterprises.
This was a comparatively easy task with Chipotle. When Ackman's fund first bought its stock in 2016, Chipotle had a 10-year track record as a public company and had expanded to about 2,000 restaurants. That was enough time to tell whether the restaurant stock would become an underperformer like El Pollo Loco or a global success more comparable to McDonald's.
McDonald's operates about 36,000 restaurants in over 100 countries. Admittedly, McDonald's operates under a franchise model, which differs significantly from Chipotle's strategy of using company-owned restaurants. However, it still provides a vague sense of where a restaurant chain like Chipotle could expand over time.
Today, Chipotle has grown to about 3,500 restaurants in five countries. Although it is far from matching McDonald's in size and scope, its growth has driven considerable returns.
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2. Invest in what you know
Additionally, Ackman is quite familiar with the restaurant industry, making it an excellent place for him to look for stocks.
Of the seven stocks in the Pershing Square portfolio now, two are restaurant operators. Chipotle, the largest holding, makes up 20% of its investments. Restaurant Brands International makes up another 17% of the portfolio.
This principle, which other famous managers such as Warren Buffett and Peter Lynch have echoed, allows investors to play to their own strengths. By understanding an industry and its specific competitive environment, one can better understand how events or changes in a business environment can affect a given stock.
Ackman likely applied this principle when he first bought Chipotle shares. In July 2015, investors began to dump the stock after an E. coli outbreak was traced to some of its restaurants. The resulting customer and investor flight caused the share price to fall by almost 50% over the next year.
Knowing the industry as he did, Ackman probably surmised (correctly) that Chipotle would be able to overcome this challenge over time and that the stock would recover. It not only recovered, it then surged much higher over time.
3. Let your winners run
The other lesson is one that Ackman may or may not have followed -- hang onto your winning stocks.
As mentioned before, Pershing Square once owned around 2.9 million shares of Chipotle. However, beginning in the third quarter of 2018, he began to steadily sell shares. Other than a modest purchase in Q3 2021, he has been gradually unloading a majority of his stake to arrive at the approximate 744,000 shares the fund holds today.
Admittedly, investors sell for many reasons. While Ackman may have hoped to invest the proceeds in higher-performing investments, Chipotle is currently the best-performing stock in the portfolio. The stock has risen by around 740% since the end of 2016, so Ackman's fund missed out on considerable gains by not holding onto more of its shares.
However, investors should remember that determining whether it's time to sell a stock is complicated. Indeed, many active stocks peaked years or decades ago with no obvious prospect of returning to their all-time highs.
Moreover, the remaining position may mean Ackman's fund has struck a balance between keeping winners and maintaining diversification. As mentioned before, Chipotle is just one of the seven Pershing Square stocks making up 20% of the fund's holdings.
The fact that the fund owns only seven stocks leaves it fairly undiversified as things stand now. Also, had the fund not sold any Chipotle stock, the majority of Pershing Square's holdings would be in only one company, leaving the fund dangerously dependent on Chipotle's performance for future returns.
Ultimately, winners tend to keep winning, and knowing an industry well can help one tell a long-term winner from a flash in the pan. Such knowledge probably influenced Ackman to hold on to some Chipotle shares and continue benefiting from its success.
Making sense of Ackman's Chipotle holding
Ackman's history with Chipotle stock shows he has not only made an excellent stock pick but also revealed lessons other investors can apply to their stock purchases.
Picking a winner requires investors to have a vision, meaning they estimate its growth potential and identify signs that the company's vision is in line with the reality of the market. Additionally, knowing an industry helps find opportunities and dangers. It can also help a shareholder differentiate between temporary and permanent challenges when tempted to sell.
Such principles may not turn a shareholder into a billionaire. Nonetheless, they can make one a seasoned, successful investor who can better capitalize on opportunities as they arise.
