Renowned activist investor Bill Ackman of Pershing Square was having another one of his wonderful years, clocking in a gross return of 13.0% on a year-to-date basis through July, compared to the 3.4% return for the S&P 500 during the same period, until the current market volatility rocked his portfolio, driving all of his funds down into negative territory. In his letter to investors for the first half of the year, Ackman emphasized how his equity holdings are handpicked after rigorous research and thus the current upheaval should just be a small bump in the long run. Three companies that Pershing Square has a significant stake in include Herbalife Ltd. (NYSE:HLF), Mondelez International Inc (NASDAQ:MDLZ), and Valeant Pharmaceuticals Intl Inc (NYSE:VRX). Ackman discussed each of them in his investor letter, and we have the details below.
Professional investors like Ackman spend considerable time and money conducting due diligence on each company they invest in, which makes them the perfect investors to emulate. However, we also know that the returns of hedge funds on the whole have not been good for several years, underperforming the market. We analyzed the historical stock picks of these investors and our research revealed that the small-cap picks of these funds performed far better than their large-cap picks, which is where most of their money is invested and why their performances as a whole have been poor. Why pay fees to invest in both the best and worst ideas of a particular hedge fund when you can simply mimic the best ideas of the best fund managers on your own? A portfolio consisting of the 15 most popular small-cap stock picks among the funds we track has returned 118% and beaten the market by more than 60 percentage points since the end of August 2012 (see the details).
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Pershing Square acquired ownership of some 120.27 million shares of Mondelez International Inc (NASDAQ:MDLZ) in early August at about $40 per share, accounting for about 7.5% of the company’s outstanding stock. There are a number of things that lured Ackman to the $58 billion snack food and beverage company. The first and foremost is the vast room for margin improvement, which many of its competitors operate at. With 3G Capital taking over Heinz and Kraft, operating margins in the packaged food industry can generally be expected to stir, as the Brazilian multi-billion dollar global investment firm is known for the higher operational efficiency and coherent organizational design that it introduces to its takeover targets. Moreover, Mondelez International Inc (NASDAQ:MDLZ) has great room for improvement in these departments, as the combination of brands comprising it, including Cadbury, Nabisco, and LU Biscuit were never fully integrated according to Ackman. Additionally, Mondelez International Inc (NASDAQ:MDLZ)’s sales in emerging markets continue to grow despite a downturn in those economies, presenting strong growth prospects. Nelson Peltz‘s Trian Partners and Boykin Curry‘s Eagle Capital Management are two large stockholders of Mondelez International Inc (NASDAQ:MDLZ) within our database, holding some 48.03 million shares and 20.19 million shares respectively.
Pershing Square’s holding in Valeant Pharmaceuticals Intl Inc (NYSE:VRX) is comprised of some 19.47 million shares valued at $4.33 billion, representing about 5.7% of the company’s outstanding stock. The fund manager is impressed at how the company has been able to make attractive acquisitions and efficiently integrate them in an otherwise fragmented and inefficient pharmaceutical industry. One such acquisition was Salix in April, the largest in Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s history, which amounts to $500 million of cost synergies. Another key acquisition, of Sprout Pharmaceuticals, came in August, whose Addyi, a female sexual dysfunction drug, could generate billions of dollars in sales as alternative treatments for the condition are almost nonexistent. While Pershing Square occupies the top spot on our list of Valeant Pharmaceuticals Intl Inc (NYSE:VRX)’s investors, Jeffrey Ubben‘s ValueAct Capital lies just at its heels holding some 14.99 million shares valued at $3.33 billion.
Despite an almost 53% surge in Herbalife Ltd. (NYSE:HLF)’s stock price this year, Pershing Square continues to hold a significant short position in the company. Although some analysts believe that the company’s troubles with the SEC and FTC are over, Ackman believes that the $4.93 billion global nutrition company is still the subject of active investigations from the SEC, FTC, Department of Justice, FBI, and State Attorney Generals on account of what he calls an ‘unlawful pyramid scheme’. Moreover, according to Herbalife Ltd. (NYSE:HLF)’s most recent financial results, sales in all regions have slumped, including North America, Central America, and the Europe Middle East and Africa region, save for China. Until now Herbalife Ltd. (NYSE:HLF) has paid about $90 million in legal costs, which even though they are marked under the non-recurring category, will only stop until the company shuts down or collapses on its own, according to Ackman. The largest investor of Herbalife Ltd. (NYSE:HLF) rooting for the company’s success is another famous activist investor, Carl Icahn of Icahn Capital. His fund holds about 17 million shares of the company valued at $936.53 million.
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