Bill Ackman - Invested In Burgers, Trains And Banks

Includes: C, CP, JCP
by: Devon Shire

It only makes sense that a great place to look for investment ideas is in the portfolios of market beating investors. Without question, Bill Ackman of Pershing Square is one of those great investors.

What makes Ackman's stock holdings an exceptionally great place to look for ideas is that he runs a very concentrated portfolio. That means that when Ackman takes a position he is risking a big percentage of his investor's capital. Therefore every idea has to be both exceptionally good, and pretty low risk and is likely being analyzed more thoroughly than stocks in the portfolio of a more diversified investor.

How concentrated is Ackman's portfolio? If you check the most recent quarterly filing from Pershing Square you will see that there are exactly 10 stocks in the portfolio. Those companies being:

Alexander and Baldwin (NYSE:ALEX)

Beam Inc (NYSE:BEAM)

Canadian Pacific Railway (NYSE:CP)

Citigroup (NYSE:C)

Family Dollar (NYSE:FDO)

Fortune Brands (NYSE:FBHS)

General Growth Properties (NYSE:GGP)

Howard Hughes (NYSE:HHC)

Kraft Foods (KFT)

J.C. Penney (NYSE:JCP)

Subsequent to the filing of this report with the SEC, Pershing has sold Family Dollar, Kraft Foods and Fortune Brands so I'll exclude those from consideration as potential investments.

What we are then left with is a small diversified mix of companies that includes a burger joint, a railway and a bank.

Burgers - Burger King Worldwide

This is not Ackman's first foray into the fast food world as he had a fabulously successful investing experience with McDonalds several years ago buying the company when it was beaten down and holding for a multi-bagger return.

Pershing Square owns an interest in Burger King through its ownership of a London listed cash shell company (Justice Holdings) which is going to merge with Burger King. Subsequent to this merger Burger King Worldwide Holdings will begin trading on the NYSE and allow investors to own shares in a company that meets the following Pershing Square investment criteria:

- a simple predictable business

- a competitive advantage due a strong brand name

- a high free cash flow generating ability.

What will be key for investors is the valuation that Burger King comes public at. While the "Whopper" business will undoubtedly be solid it can still be a poor investment if the valuation isn't attractive.

Trains - Canadian Pacific Railway

Since I am Canadian I had front row tickets to Ackman's proxy fight that was waged in order to enact change at Canadian Pacific. The battle was well covered in the Canadian media.

Canadian Pacific is a turnaround situation where the success of capital invested is going to depend on "turning around" the business. Warren Buffett has long avoided turnaround situations saying that "turnarounds usually don't turn". But Ackman thinks this one will work because the turnaround is dependent on the company raising margins through a reduction of costs, rather than increasing revenues.

With operating margins at half that of its nearest Canadian competitor it does seem like there should be some low hanging fruit available to easily improve CP's bottom line.

Banks - Citigroup

At roughly $28 per share Citigroup is likely worth another hard look. Fear is still very much in the air and investors don't have to think back very far to remember reasons why they should be afraid of investing in Citigroup. And I think that fear is pretty clearly in Citigroup's share price today.

But Citigroup of today is much different than Citigroup of 2008. The balance sheet has been put through the cleaner and the company has been recapitalized. According to Pershing's most recent letter (linked earlier) Ackman thinks that Citi is a well capitalized bank and that eventually the return of some of that capital through share repurchases and dividends will be a catalyst for the stock market to recognize that value.

Trading at roughly 60% of its tangible book value it likely isn't unreasonable to think that Citigroup could trade at twice the current share price in a couple of years as earnings are retained and this fear discount is removed.

I don't currently own any of these companies, but would likely put Citigroup on the top of my list should I invest in one of Ackman's holdings. I base that on the belief that book value today is a pretty reliable number given the constant and thorough scrutiny Citi's balance sheet has been under for the past several years from Government regulators. At this point in the cycle the asset values on the balance sheet likely actually mean something.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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