Billionaire investor William ‘Bill’ Ackman manages the hedge fund Pershing Square Capital Management. Though based in New York, this fund is accessible to UK investors via Pershing Square Holdings (LSE: PSH), which is an investment trust in the FTSE 100.
Incredibly, Ackman has more than doubled the total return of the S&P 500 over the last five years. And the Pershing Square share price has rocketed almost 200% during this time.
This makes it the best-performing Footsie stock of the last half decade (just ahead of Ashtead and Frasers).
Many hedge fund managers run incredibly concentrated portfolios and Ackman is no different. As of December, he had 37% of his $10bn+ portfolio split between just two companies.
These were Alphabet (NASDAQ: GOOG)(NASDAQ:GOOGL), accounting for nearly 19% of his invested assets, and Chipotle Mexican Grill (NYSE: CMG), which made up just over 18%.
Here’s why Ackman owns this excellent pair of stocks.
Alphabet
Alphabet owns Google, which has a monopolistic 91% share of global internet search. It’s also the parent of YouTube, Google Cloud, and self-driving firm Waymo.
Last year, the tech behemoth made $73.8bn in net profit from $307bn in revenue. This makes it one of the most profitable businesses the world has ever seen.
However, that didn’t stop investors from dumping the stock early last year over fears that Google’s search dominance was under threat from ChatGPT and generative artificial intelligence (AI).
Ackman didn’t agree and started scooping up shares. That move has worked out well, with his position up more than 50% since. He said Google “will be a dominant player in AI for the very, very long term”.
While I agree with that statement due to the firm’s mind-boggling amounts of data, there are potential risks here. Google has released Gemini, its own AI chatbot, which has made some very public mishaps.
Moreover, it is far costlier and less profitable for Gemini to generate an answer than traditional search. That’s why Google is reportedly considering putting some of its core AI products behind a paywall.
Despite these risks, Wall Street still sees the firm growing its top line by 10% over the next few years. And the stock’s valuation looks reasonable at 23 times this year’s forecast earnings.
That’s cheaper than all the other ‘Magnificent Seven’ members: Apple (25.7), Amazon (43.1), Meta (25.5), Microsoft (36), Nvidia (34.8), and Tesla (55.1).
Therefore, Alphabet shares could be worthy of consideration for a portfolio (I invested in early 2023).
Chipotle
Similar to Alphabet, Ackman first invested in shares of Chipotle back in 2016 when they were going through a rough patch. This followed food poisoning outbreaks at some of its restaurants in 2015.
The stock has been a monster winner since then, proving that Ackman has a real knack for spying lucrative opportunities.
Chipotle’s organically grown produce and rejection of preservatives or artificial flavours (and freezers and microwaves) has resonated with customers, separating it from the competition. As a result, earnings growth has been strong for years.
Unfortunately, that growth comes with a hefty price tag today. At $2,965, the stock is trading at 66 times earnings. I wouldn’t invest at that price.
However, I’m happy to hold Pershing Square shares, and expect Ackman to sniff out more such bargains in future.
