Billionaire Bill Ackman has 37% of his Pershing Square portfolio invested in two brilliant stocks

Billionaire Bill Ackman is the founder and CEO of Pershing Square Capital Management, a hedge fund that has returned 183% in the five-year period ending June 2024. During the same period, S&P 500 (^GSPC 0.20%) advanced only 102%.

Ackman is no stranger to the public spotlight. His failures and successes were widely chronicled by the media, including the billion dollars he lost betting against the vitamin company. Herbalife and the $2.6 billion it made in a few weeks during the pandemic.

Ackman’s market record makes him a worthwhile case study. For example, 37% of its Pershing Square portfolio was invested in two stocks as of the June quarter: 20% in Alphabet (GOOGL 1.03%) (GOOG 0.96%) and 17% in Chipotle Mexican Grill (CMG -2.78%).

Those stocks have been brilliant investments in the past. Both have roughly doubled the S&P 500’s gains since Ackman first bought shares. Of course, it reduced its position in Alphabet and Chipotle by 16% and 23%, respectively, in the June quarter. Those are sizable discounts, but Ackman’s current asset allocation is still a clear sign of confidence.

Alphabet: 20% of Bill Ackman’s portfolio

Alphabet reported solid financial results for the second quarter. Revenue rose 14% to $84.7 billion and GAAP net income rose 31% to $1.89 per diluted share. CEO Sundar Pichai said, “Our strong performance this quarter highlights continued strength in search and momentum in the cloud.” The only blemish was YouTube ad revenue, which narrowly missed estimates, sending the stock lower.

Adding to the downward momentum was the recent ruling that Alphabet violated antitrust laws by paying billions of dollars to browser developers and smartphone makers to ensure Google was the default search option. For example, Alphabet paid Apple about $20 billion in 2022 for default placement on the Safari browser and iOS devices, according to The Wall Street Journal.

Similar deals are likely to be banned in the future, but the Justice Department is also weighing other options to curb Alphabet’s monopoly power. This includes a forced surrender of the Chrome browser or the Android operating system. Google Search is directly integrated with those products, which has undoubtedly helped it become the dominant search engine.

Whispers of a possible breakup sent Alphabet shares down 3% on Wednesday, but investors are taking the plunge. Google controls about 90% of the online search market and is the world’s largest digital advertiser. That dominance is based on expertise in search algorithms and artificial intelligence (AI), and it wouldn’t disappear if the company were forced to give way to Chrome or Android.

In addition, none of the legal cases pending against Alphabet target its cloud computing division, which should be an important driver of growth as the business invests in AI. Forrester Research recently recognized Google as a leader in AI infrastructure solutions and large language models. These strengths helped the company gain a percentage point of market share in the June quarter.

Going forward, Wall Street expects Alphabet to grow revenue by 16% annually through 2026. That makes its recent valuation of 23 times earnings look reasonable. Investors should take advantage of the recent dip and buy some declining stocks.

Chipotle Mexican Grill: 17% of Bill Ackman’s portfolio

Chipotle also had a good second quarter. Revenue rose 18% to $3 billion on strong same-store sales, and non-GAAP net income rose 36% to $0.34 per diluted share. CEO Brian Niccol said: “Our focus and training around manufacturing has paid off as we have been able to meet strong demand trends with outstanding service and speed.”

Importantly, Chipotle once again bucked the contractionary trend facing the broader restaurant industry. While the average restaurant reported a decline in same-store sales and customer traffic in the second quarter, Chipotle reported an 11.1% increase in same-store sales, reflecting an 8.7% increase in transactions and a 2.4% increase in check sizes.

Focusing on yield is one of the reasons the company has been so successful. Employees are frequently retrained on fundamentals, and Chipotle has implemented new coaching tools and automation solutions. These efforts collectively get people through the line faster, improving sales and customer satisfaction in the process.

More broadly, Chipotle has built its brand authority with its “food with integrity” philosophy. The company sources only responsibly raised meat, free of antibiotics and hormones, and uses only fresh ingredients. That means no preservatives or freezers are involved. As a result, customers see Chipotle as a delicious and slightly healthier option than fast food alternatives.

Wall Street continues to expect Chipotle to grow earnings by 17% annually through 2026. That consensus estimate makes its recent valuation of 50 times earnings look a little expensive, but investors may not have a much better chance to buy stocks in the short term. The stock recently fell on news that CEO Brian Niccol will leave the company at the end of August to take up the CEO position at Starbucks. Investors interested in owning Chipotle should consider buying a small position today.