Billionaire Bill Ackman sold this stock split in Q2. Should you sell it too?

Billionaire Bill Ackman may or may not like eating out. But he sure seems to like investing in companies that profit from dining out. His hedge fund Pershing Square Capital Management owns just nine stocks — and two are in the restaurant industry.

Of these two restaurant stocks, Ackman has the larger position in Chipotle Mexican Grill (CMG -0.52%)which conducted a massive 50-for-1 stock split after the market closed on June 25. However, he’s not as invested in Chipotle now as he was earlier this year. Ackman first sold this split stock in the second quarter of 2024.

Ackman escapes Chipotle stake

The billionaire reduced Pershing Square’s stake in Chipotle by 22.5% in Q2. Even after selling 8.38 million shares, Chipotle is the second largest in his hedge fund’s portfolio.

Ackman first bought Chipotle shares in the third quarter of 2016. He increased the Pershing Square position more than fivefold in the following quarter. However, Ackman has sold far more of the stock than he has bought since then, including selling in five of the last six quarters.

Chipotle has been a big winner for the hedge fund manager over the years, exploding more than 520% ​​since the end of the third quarter of 2016.

Why did Ackman sell so much of Pershing Square’s stake in Chipotle in Q2? Maybe he wanted to take some profits off the table. However, it did not go down hard on the restaurant industry in general. In Q2, Ackman increased his hedge fund position in Restaurant Brands Internationalwhich operates Burger King, Firehouse Subs, Popeyes, Tim Hortons and other restaurant chains.

Chipotle’s roller coaster ride

Ackman’s latest reduction in Pershing Square’s stake in Chipotle came at a good time. Shares rose as much as 50% in the first half of the year, but began a more than 20% decline in late June.

The strong early 2024 gains were driven primarily by Chipotle’s strong quarterly earnings growth. In February, the company reported that full-year 2023 earnings per share (EPS) rose 38% year-over-year, with 2023 quarter EPS up more than 27%. In April, Chipotle announced that Q1 2024 EPS rose nearly 24% year-over-year, with adjusted EPS up more than 27%.

Excitement surrounding the company’s 50-for-1 stock split also likely contributed to Chipotle’s impressive performance in the first half of 2024. This stock split ranked among the largest ever in the history of the New York Stock Exchange. York.

What caused Chipotle’s stock to fall? Part of the decline was probably due to the general market pullback in recent months. However, the main culprit was the unexpected departure of CEO Brian Niccol. On August 13, 2024, Chipotle announced that Niccol was leaving to become president and CEO of Starbucks.

Should You Sell Chipotle Shares Too?

I don’t think anyone should sell Chipotle just because Ackman reduced his hedge fund’s stake in the stock. However, there are other reasons to consider selling.

While Chipotle should easily find a new CEO, Niccol leaves big shoes to fill. Some investors believe that the adage about betting on the jockey and not the horse applies to stock investing, and with Niccol screwing for Starbucks, those investors may want to sell their Chipotle shares.

In my opinion, however, the main reason to sell Chipotle is valuation. The stock is trading at a forward price-to-earnings ratio of nearly 48. Although Chipotle is generating strong earnings growth, I don’t think its growth warrants that premium multiple.