Billionaire Bill Ackman has 53% of his hedge fund’s $10.6 billion portfolio invested in just 3 stocks

Bill Ackman is one of the most famous billionaire investors in the world. His hedge fund, Pershing Square Capital, focuses on a handful of high-quality businesses where Ackman believes the stock has become misplaced relative to its value. He will then buy shares and use his influence to unlock shareholder value.

As an activist investor, he can only focus on so many businesses at once. That means he only goes for what he thinks are his biggest opportunities. As a result, Pershing Square has a highly concentrated portfolio, and just three stocks account for more than 53% of its $10.6 billion in public equity holdings.

1. Hilton Worldwide (19.7%)

Hilton Worldwide (HLT -0.52%) it grew to become Ackman’s largest position for Pershing Square. The investor first accumulated shares of the world’s largest hotelier in 2016, but only in 2018 did he have the opportunity to establish a significant position in the stock market during the market downturn.

“Hilton’s extensive and growing network of brands and properties provides a significant and self-reinforcing value proposition to both guests and hotel owners, which creates a strong competitive moat around the business,” Ackman wrote to investors. in 2018.

That moat has grown stronger as Hilton has expanded its brand count to 24 and counts more than 7,700 participating hotels. Its loyalty program has grown from $80 million when Ackman invested in 2018 to more than $195 million today. The two create a network effect: as more hotels join the Hilton portfolio, it attracts more customers to the loyalty program and vice versa.

Hilton grew quickly to support its expansion. Revenue per available room rose 3.5% in the second quarter, and management expects full-year growth between 2% and 3%. It also has a pipeline of another 508,300 rooms in development. As Hilton expands its management operations, it should see good margin growth as it increases revenue per room.

While Ackman sold some Hilton shares to make room for smaller new positions in the second quarter, his firm still owns about 9 million shares worth $2.1 billion. That makes him his greatest position. At the current price, it is trading near the upper end of the range between historical enterprise value and EBITDA (earnings before interest, taxes, depreciation and amortization), excluding the impact of the COVID-19 pandemic. Investors may want to examine Hilton more carefully before following Ackman’s lead.

2. The alphabet (18.2%)

While many have seen artificial intelligence (AI) as a major threat to Alphabethis (GOOG -2.47%) (GOOGL -2.44%) Google’s main search business, Ackman saw the company’s opportunity to take advantage of recent innovations in AI. He bought shares in the company in the first quarter of 2023, just as the AI ​​boom was starting. He has since added to his position and now owns 7.5 million C shares and nearly 4 million A shares. Combined, they are worth about $1.9 billion.

Google’s position as one of the big three public cloud platforms has led to strong operating results for its Google Cloud business. It surpassed $10 billion in quarterly revenue in the second quarter, up from $7.3 billion at the end of 2022.

Alphabet is spending heavily on AI to support the growth of Google Cloud and build new AI features into Google Search. The efforts have paid off, as management says its new AI overview feature in search has increased engagement and satisfaction with search results. That said, the company has cut expenses in other areas, leading to an increasing operating margin.

The stock currently trades at a forward price-to-earnings (P/E) ratio of around 20. Meanwhile, analysts expect AI and other trends to drive Alphabet’s earnings above 20% on average over the next five years. That makes Alphabet a very attractive stock at the current price.

3. Chipotle Mexican Grill (15.5%)

Ackman established an initial position in the Chipotle Mexican Grill (CMG -0.67%) in 2016 after food safety concerns led to a huge sell-off of the stock. He gobbled up 2.9 million shares by the end of that year. Although it has sold about 80 percent of that position since then, Chipotle remains one of Pershing Square’s largest holdings, worth about $1.6 billion.

He cited Chipotle’s strong brand, differentiated product and substantial size as reasons to believe the company can bounce back from its food safety challenges of the previous year. He saw an opportunity for the chain to double its store count from about 2,200 at the end of 2016.

Today, traffic has more than recovered, and Chipotle operates 3,530 restaurants. Management said it plans to open 7,000 locations in the long term.

Chipotle is seeing strong performance from existing stores, even as it opens new locations at a strong pace. Same-store sales rose 11% in the most recent quarter, driven by both transaction volume and average ticket size. It also builds on its Chipotlanes drive-thru concept, which includes about 80 percent of new store openings.

These can contribute to greater same-store sales growth. Strong same-store sales led to improved restaurant operating margins, which climbed to 28.9% in the second quarter, up 140 basis points year-over-year.

Chipotle recently lost its CEO Brian Niccol Starbucks. As CEO since 2018, he has been largely responsible for much of the company’s turnaround and success since Ackman took over in late 2016. However, Chipotle has an excellent roadmap to success and a track record. long for continued growth.

That said, the stock’s valuation has risen to reflect the company’s strong outlook. The stock is currently trading at 44 times next year’s earnings estimates. With that kind of premium, investors might be better off waiting for a pullback before placing their next order for Chipotle stock.