Wealthy investor Bill Ackman allocates approximately 45% of his hedge fund's total $13.4 billion assets towards investing in only three distinct stocks.
Bill Ackman prefers to concentrate on a few companies at a time. His hedge fund, Pershing Square Capital, invests in top-notch businesses with shares that Ackman believes are undervalued relative to their inherent worth. He then leverages his position as a significant shareholder to influence management and unlock value.
Ackman's activist investor approach necessitates a limited portfolio. He needs a substantial stake in a company to exert influence, and his focus and sway are finite. Consequently, over 45% of Pershing Square's $13.4 billion portfolio is invested in just three companies.
Ackman's focus on long-term value makes these three stocks appealing constituents for individual portfolios.
1. Alphabet (16.5%)
Ackman purchased shares of Alphabet (GOOG 1.31%) (GOOGL 1.25%) amidst investor worries about how artificial intelligence (AI) would affect Google's core Search business. As AI-driven apps like ChatGPT and Perplexity gained popularity, concerns arose that they might outperform Alphabet's primary source of revenue.
Ackman owns around $2.2 billion worth of the company across Alphabet's Class A and Class C shares as of the present moment. He slightly reduced his holdings in the second quarter, but the stock's impressive performance ensured its prominence in his portfolio.
Alphabet's recent market performance is commensurate with its efforts. While many still doubt AI chatbots like ChatGPT would pose a threat to Google, the company has successfully integrated AI into its search results, boosting user engagement and satisfaction, according to management.
Additionally, AI-backed innovations like Circle to Search and Google Lens are witnessing increased engagement, especially in highly lucrative sectors such as shopping and product discovery. AI contributed to the quarterly growth of the "Google Search and other" segment by 12%.
Furthermore, AI investments are driving revenue for the Google Cloud division, one of the three major public cloud providers. Google Cloud revenue surged by 35% last quarter due to an increase in the adoption of its AI Infrastructure and services. The robust revenue growth is finally translating into positive operating profits, which rose from a $440 million loss in the third quarter of 2022 to a $1.95 billion profit last quarter.
While Alphabet encounters some challenges, including regulatory obstacles, the stock currently trades at an incredibly attractive valuation. Despite trading near its all-time high, shares are priced at approximately 21 times analysts' 2025 earnings projections. This is a compelling price for a company with the growth potential of Alphabet. Investors interested in AI-related stock should seriously consider adding Alphabet to their shortlist.
2. Brookfield (14.4%)
Ackman began acquiring shares in alternative asset management company Brookfield (BN 0.43%) (BN 0.72%) in the second quarter, significantly expanding his holdings in the third quarter. He currently owns around $1.9 billion worth of the Canadian-listed shares.
Brookfield operates in various industries, including infrastructure, renewable energy, services, real estate, and insurance. Notably, it has a track record of making decisions to enhance share value by making the shares more attractive to investors.
For instance, in 2020, it created Brookfield Renewable as part of its Brookfield Renewable Partners subsidiary. Changing from a partnership to a corporation facilitated significant investments from institutional investors, as some pension funds and insurance companies disallow investments in partnerships.
Brookfield split off its asset management business last year, retaining a 73% stake in it. In October, Brookfield Asset Management relocated its headquarters to New York, and its private stake in the asset management business will become publicly tradable shares. These moves will make Brookfield Asset Management eligible for inclusion in U.S. stock indexes, resulting in more passive index funds and investors buying the shares.
However, Brookfield's strategy extends beyond attracting capital. The company's future prospects look promising. Management expects compounded annual growth in free cash flow of more than 20% over the next five years, resulting in $47 billion in total free cash flow. Management plans to invest $36 billion in this cash flow and distribute the remaining to shareholders through dividends and share repurchases.
Brookfield's stock has surged in the second half of 2024 due to Ackman's investment. Both the US and Canadian shares have increased by over 40% since the end of June. Despite the significant price appreciation, shares are currently trading at just over 15 times distributable earnings for the trailing 12 months. Management believes the shares could be worth 23 times distributable earnings at their full value. As a result, investors interested in alternative assets may have an opportunity to buy shares of Brookfield while they remain undervalued.
3. Hilton (14%)
Ackman's involvement with Hilton (HLT at 0.57%) had an initial hiccup in 2016. Immediately after purchasing shares, the stock saw a significant surge in value, prompting him to cash out. However, he got another chance in 2018 and capitalized on it, developing a substantial stake in the hospitality company. Leveraging the market dip during the COVID-19 outbreak, he enlarged his position substantially during the first quarter of 2020.
Ackman wasn't reluctant to reap profits from Hilton in the recent past. Despite offloading 18% of Pershing Square's shares, the hedge fund still retains approximately $1.9 billion worth of shares, as of now.
Ackman's belief in Hilton's potential hasn't wavered since he penned down his thoughts in 2018. He expressed, "Hilton's expansive and proliferating brand and property portfolio provides a substantial and self-strengthening value proposition to both guests and hotel proprietors, underpinning a robust competitive barrier around the business." In 2020, he further stated, "We also anticipate that the crisis will induce standalone hotels to seek affiliation with global brands such as Hilton, which will fuel the company's prolonged growth."
Hilton has seen a 36% surge in the number of its total properties from over 6,110 at the end of 2019, to 8,301 by this year. The company has broadened its product range to cater to a wider consumer base, resulting in more enrollments in its loyalty program. As of now, the program boasts over 200 million Hilton Honors members. This growing portfolio of properties and Hilton Honors memberships causes a network effect: More hotels joining the program attract an influx of consumers, and vice versa.
Hilton's stock price performance has resulted in shares trading at around a 30 times enterprise value-to-EBITDA ratio, which is one of its highest valuations, outside of the 2020-2021 period when pandemic factors distorted results. It goes without saying that Ackman is cashing out some of his earnings at this level. Nevertheless, Ackman's continued heavy investment in the hotel giant indicates his continued optimism about Hilton's future, but investors might want to consider alternative investment opportunities considering the current stock price.
- Bill Ackman's investing strategy with Alphabet includes not only purchasing shares but also actively engaging with the company to leverage its potential in AI. He believes that Alphabet's substantial investments in AI can drive future growth, making it an attractive opportunity for long-term value investors looking at tech stocks with undervalued shares.
- In terms of finance and investing, Ackman's significant investment in Brookfield has the potential to yield substantial returns, given its diversified portfolio and strategic moves to make shares more attractive to institutional investors. Investors interested in alternative assets may benefit from considering Brookfield's undervalued shares.
