When it comes to hedge fund managers, Bill Ackman is in a class by himself. He etched his name in Wall Street history by bucking hedge fund norms, acquiring large stakes in a few companies, and holding them for the long term. Furthermore, as a well-known activist investor, he sometimes takes risks on distressed companies and pressures management to make changes that positively impact shareholder value.
Ackman heads the hedge fund Pershing Square Capital Management he founded, which has more than $11.3 billion in assets under management. Pershing typically owns between eight and 12 large companies in North America. To be effective, they must be of high quality, have limited downside, and generate recurring and predictable cash flows. This playbook has been so successful for Ackman, Pershing Arena has generated a return of 31% annually over the past five years, nearly twice revenues Standard & Poor's 500.
To close out 2023, Pershing Square owns stakes in just eight stocks, but one of them is outperforming the rest.
Let chips fall where they may
By far the largest property in Pershing Square's portfolio Chipotle Mexican Grill (NYSE: CMG). Ackman has accumulated approximately 825,000 shares currently worth more than $2.6 billion, making up 23% of his investment portfolio.
Chipotle is not only one of the most famous companies in the world, but it is also among the most successful. Since the company's debut in 2006, the stock has risen from just $22 to nearly $3,200 as of this writing, generating returns of 14,441%.
In late March, Chipotle announced that its board of directors had approved a Stock split 50 for 1Making it “one of the largest stock splits in the history of the New York Stock Exchange (NYSE).” The split will require shareholder approval when Chipotle holds its annual meeting on June 6. If the action is approved, and there is no reason to believe otherwise, each registered shareholder will receive an additional 49 shares for every share he or she owns after the market closes on June 25.
For context, instead of owing one share worth $3,200, investors would own 50 shares worth $64 each.
Why did Ackman single out Chipotle?
Akman has selected just eight stocks to make up Pershing Square's $11 billion portfolio, so it's already a rare company to make that cut. He added Chipotle shares for the first time in 2016 after Fast casual pioneer It suffered a series of food safety issues that sent diners and investors alike packing, and the stock price halved.
However, while some investors saw a risk, Ackman saw an opportunity — thanks in part to his long-term outlook. Pershing Square's most recent annual report cited Chipotle's “continued focus on exceptional food and operational excellence” as the catalyst for its strong growth. The report also noted “industry-leading same-store sales growth and profitability.”
Clearly, Ackman is on to something. In the first quarter — even as competitors dealt with headwinds — Chipotle's revenue increased 14% to $2.7 billion, driven higher by comparable restaurant sales that jumped 7%. The company's operating margin and restaurant-level operating margin are up thanks to Chipotle's financial discipline. Perhaps most impressive were the company's earnings, where adjusted earnings per share (EPS) jumped 27% to $13.37.
According to Ackman, Chipotle “has a long runway for strong growth.” He cites the company's ability to continually improve same-store sales and profitability, as evidenced by its recent results. It also points to as-yet-untapped growth in North America, given Chipotle's plans to increase its location county by 8% to 10% annually. Not to mention the ongoing international expansion, which includes growth throughout Europe and a recently signed franchise agreement to expand into the Middle East.
Finally, Pershing noted in his annual report the success of CEO Brian Nicol, writing: “Chipotle stock has risen more than 10-fold since Brian became CEO in March 2018. What more can we say?” High praise indeed, coming from one of the world's most successful hedge funds.
Is Chipotle Stock a Buy Now?
Chipotle has already posted impressive gains so far in 2024, with the stock up 40% year to date (as of this writing), on top of a 65% gain in the past year. As a result, the stock is fairly expensive, currently selling for 58 times forward earnings and nearly 7 times forward sales. A valuation of this magnitude indicates that investors have high expectations built into the stock price. If Chipotle fails to live up to those expectations, the stock could fall.
However, for investors with a long investment time horizon, Chipotle Still He has all the traits of a long-term winner. Given the company's track record and continued expansion opportunities, the evidence suggests that five to ten years from now, we could be having this discussion about the merits of Chipotle. once again.
For investors who can't afford to buy the stock at its current multiples, add it to your watchlist and buy on any weakness.
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Danny Vina He has positions at Chipotle Mexican Grill. The Motley Fool enjoys and recommends locations at Chipotle Mexican Grill. The Motley Fool has Disclosure policy.
Learn about the stock splits that make up 23% of billionaire Bill Ackman's $11 billion portfolio Originally published by The Motley Fool