As the manager of over $5.7 billion at Pershing Square Capital, William Ackman is a high-profile, activist investor whose trades are closely watched by the investing community. Those who observe his trades do so with the hope of gleaning some insight into market trends, as well as the strengths of certain companies within a wide range of industries. Known for his history of taking concentrated positions in the companies in which he is interested – with a view to affect management changes from within – Mr. Ackman’s track record has earned him a strong reputation as a successful trader.
The Howard Hughes Corp. (NYSE:HHC) – As of the end of the fourth quarter of 2010, Mr. Ackman added to his holding of HHC, increasing his position size at an estimated average purchase price of $47.13 per share; this resulted in a portfolio weight for HHC of 3.33%. This holding is another representation of Mr. Ackman’s view that the real estate market is stronger than believed and is on the verge of a real recovery. The company owns property across 18 states and the true value comes from the fact that most valuations account for current flows and ignore future potential upside.
If the real estate market recovers as sharply as Mr. Ackman expects, the solid management team of HHC will be able to take advantage of its underdeveloped balance sheet. On a valuation basis, with negative earnings per share the company looks weak relative to competitors Taubman Centers, Inc. (NYSE:TCO) and Washington Real Estate Investment Trust (NYSE:WRE).
Automatic Data Processing, Inc. (NASDAQ:ADP) – As of the end of the third quarter of 2010, Mr. Ackman added to his holding of ADP, increasing his position size at an estimated average purchase price of $40.74 per share; this resulted in a portfolio weight for ADP of 0.45%. Subsequent trades have left Mr. Ackman’s position at a portfolio weight of 0.0%, having liquidated his holding in the first quarter of 2011.
In terms of pure valuation metrics, ADP is very similar to its most prominent competitor in the payroll processing space, Paychex, Inc. (NASDAQ:PAYX). Where PAYX really shines as the stronger play, and a possible reason for Mr. Ackman’s exiting his position in ADP, is in terms of operating margin: where ADP reports an operating margin of 18.5%, PAYX reports the same metric at 37.7%. Over the long-term, PAYX is a better value because most other metrics are roughly equal.
Citigroup, Inc. (NYSE:C) – As of the end of the second quarter of 2010, Mr. Ackman added to his holding of C, increasing his position size at an estimated average purchase price of $41.50 per share; this resulted in a portfolio weight for C of 15.73%. In his third quarter 2010 letter to shareholders, Mr. Ackman commented that the company’s management was proceeding as hoping, that the regulatory risks associated with Basel III had continued to clarify, and the government sale of shares was believed to be in the process of being resolved. For these reasons, he argued, the shares were a good value in the long-term since the factors mentioned had aided in keeping the share price depressed.
Since these statements, most have come to fruition, and now, only J.P Morgan (NYSE:JPM) has a cleaner reputation on the street. The uncertainty that lingered around the company in the aftermath of the financial crisis that brought down Lehman Brothers and Bear Stearns, have, in fact, provided an opportunity for investors willing to accept some risk and invest early in the cleanup.
McDonald’s Corp. (NYSE:MCD) – As of the end of the third quarter of 2009, Mr. Ackman added to his holding of MCD, increasing his position size at an estimated average purchase price of $56.25 per share; this resulted in a portfolio weight for MCD of 10.66%. Subsequent trades have liquidated his holding in MCD at an estimated average price of $61.31, having turned his attention to rival Wendy’s (NASDAQ:WEN). Despite Mr. Ackman having exited the stock some time ago, it has begun to look very attractive again, particularly relative to its close competitor Yum! Brands, Inc. (NYSE:YUM).
By the numbers, MCD has a more attractive valuation on a trailing price-to-earnings ratio basis (17.5 relative to 20.7 for YUM). Where the company really stands out is in terms of operating margin – MCD has an operating margin of 30.4% relative to 16.2% for YUM. MCD has been very successful in the introduction of its McCafe line. This line has allowed the company to increase its margins, while still providing a great value to its customers. This has allowed MCD to take market share from Starbuck’s (NASDAQ:SBUX) and others, and has been a significant growth catalyst.
Corrections Corp of America (NYSE:CXW) – As of the end of the third quarter of 2009, Mr. Ackman added to his holding of CXW, increasing his position size at an estimated average purchase price of $19.40 per share; this resulted in a portfolio weight for CXW of 5.32%. CXW is the largest private operator of prisons in the US. At the time of this acquisition, Mr. Ackman saw upside of over 130% against a backdrop of rising crime rates during a time of recession.
This company commanded a 48% market share at the time of acquisition and still has solid financial metrics relative to competitors. CXW has an operating margin of 19.1% relative to 10.7 % for The GEO Group, Inc. (NYSE:GEO). In addition, the company’s shares look cheap, trading at a trailing price-to-earnings ratio of 13 while GEO is trading at 18.7.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.