On Thursday William Ackman, head of the hedge fund Pershing Square Capital, floated the idea of having the firm go public. Ackman manages nearly $6 billion and, according to The Wall Street Journal, believes that acting as a public company may allow them to raise more money and hold positions for longer durations. An announcement like this leads me to believe that Ackman has identified a number of distressed or significantly undervalued companies that he'd like to invest in, but isn't currently invested in. Could the overall market be under-valued or just specific stocks?
Like Chase Coleman, who I've also highlighted, Ackman prefers a focused portfolio and currently holds only 10 stocks. He's an activist investor, but not in the way that typically comes to mind. Instead of being confrontational, Ackman prefers to use the force of his reason and logic to persuade a company's Board and senior management to follow his recommendations. While not noted below, there is speculation that Ackman has interest in Best Buy (BBY) as well.
Let's take a look at Ackman's six largest positions:
J.C. Penney (JCP): J.C. Penney made a fantastic new hire in Ron Johnson from Apple (AAPL). Along with Steve Jobs, Johnson was an architect of the unique and highly effective Apple store layouts, customer service training, and overall experience. The unique nature of Apple means much of this isn't transferable to J.C. Penney stores, but Johnson also has experience as an executive at Target (TGT) and he no doubt will bring improvements. One of the most fascinating aspects of this deal is that Ackman was instrumental in Johnson paying to become the CEO. As part of the package that brought him to J.C. Penney, Johnson purchased $50 million in warrants for $6.89 that must be held for at least six years. The strike price is $29.92. If shares are below that price, Johnson loses his investment. If they're above $29.92 plus the cost of the warrants, Johnson will come out ahead, perhaps very much so. This ensures Johnson's focus will be on long-term value creation.
J.C. Penney makes up about 22% of Ackman's portfolio, as of March 31. He also owns call options on another 4.16 million shares, meaning this investment is close to 25% of his entire portfolio. Of course the large price rise after the Johnson hire means Ackman has come out way ahead so far, but it appears that he'll be involved with the company for many years to come.
General Growth Properties (GGP): Ackman spent about $50 million on GGP shares when it appeared shares would end up worthless. That stake has increased 20 fold. He has said that it was the best investment he ever made. The party may not be over yet, though. Even from today's prices, Ackman believes shares can double over the next few years and he continues to hold his position. General Growth makes up about 19% of his portfolio.
Fortune Brands (FO): Fortune Brands makes up about 18% of Ackman's portfolio. He slightly added to his position on June 7 and now holds 17.2 million shares. In December, as the behest of Ackman, Fortune announced they would be splitting the business into three parts: golf, home products, and alcohol. Under the plan, the alcohol brand would continue to operate under the Fortune name, and the other two segments would be spun off or sold. A buyer has already been found for the golf unit for $1.23 billion. The sale should be completed by late summer.
Kraft (KFT): Ackman has owned Kraft since the first quarter of 2010. Currently the company makes up about 12% of his portfolio. While Warren Buffett was very much against the 2010 Cadbury deal, Ackman was in favor of it. Shares are up more than 15% since the deal was announced in early 2010 and Cadbury significantly contributed to increased revenue so far in 2011. Even with the stock price rise, shares yield 3.4% with a forward P/E around 14.
Citigroup (C): Citi has been a difficult investment so far for Ackman. He first bought into the bank in the second quarter in 2010. It now makes up about 11% of his portfolio. Shares have been essentially flat since his first purchase. His thesis hasn't changed on the name and he thinks shares are as cheap as ever. Like most of the financials, a little more economic and regulatory certainty will help tremendously.
Family Dollar (FDO): Ackman bought into Family Dollar in the first quarter of this year, and nearly doubled his stake in early June. His position now makes up about 9% of his portfolio. Ackman is now the largest investor in Family Dollar. He recently gave a presentation on the idea which can be found here. The gist is that Family Dollar is a price leader and can maintain market share in recessions and good times. He believes there is tremendous opportunity for store growth and he thinks a buy-out is likely and would help the company bridge the gap between it and Dollar General (DG). Don't forget, Nelson Peltz still has a $55 to $60 buyout offer on the table and shares right now are in the low $50's.