Bill Ackman Presentation Discusses Top Picks, Takes Another Shot at Herbalife

Billionaire Bill Ackman‘s Pershing Square has been in the news through this year due to the poor performance of some of the fund’s top stock picks and its efforts to help turn Valeant around, which included the appointment of Mr. Ackman to the company’s board as a Director. Pershing Square recently gave a slideshow presentation to its European investors at its annual meeting, revealing its performance thus far in 2016 and its current view on its portfolio holdings. According to the presentation, the fund’s total assets under management (AUM) at the beginning of April stood at $11.37 billion and the fund lost 25.6% during the first quarter. However, it recovered some of the losses early in the second quarter as Valeant made a small rebound. As of April 19, the fund’s year-to-date losses stood at 16.8%. In the presentation, Pershing Square also highlighted it’s performance since inception, which remains stellar despite the recent struggles, as it has generated net returns of 476.7% since its inception versus the S&P 500’s gain of 143.7% during the same period. In this article, we are going to discuss five of Pershing Square’s notable positions and see what the fund thinks about their current prospects and expected performance.

We track prominent investors and hedge funds because our research has shown that historically their stock picks delivered superior risk-adjusted returns. This is especially true in the small-cap space. The 15 most popular small-cap stocks among a select group of investors delivered a monthly alpha of 80 basis points between 1999 and 2012 (see the details here).

Mondelez International Inc (NASDAQ:MDLZ)

 – Shares Owned by Pershing Square (as of December 31): 43.37 Million

– Value of Pershing Square’s Holding (as of December 31): $1.94 Billion

– Q1 Return: -10.1%

Let’s start with Mondelez International Inc (NASDAQ:MDLZ), in which Pershing Square held a 5.7% stake (inclusive of its derivatives positions) at the time of its presentation. Shares of the confectionary giant tumbled in February after the company reported its fourth quarter results, but have been on an upward march since then and are currently trading down marginally for the year, by 2.6%. Pershing Square still remains confident about the future prospects of the company, seeing enormous potential for margin expansion. The fund applauded Mondelez International Inc (NASDAQ:MDLZ)’s move towards zero-based budgeting, but feels it is less robust than the zero-based budgeting that 3G Capital implemented in its portfolio companies. According to the fund, the $1.5 billion that Mondelez International invested recently in upgrading its manufacturing base could help the company expand its gross margins by as much as 250 basis points by 2018. In the presentation, Pershing Square acknowledged that the company “is making progress with their plan to increase margins to 17-18% by 2018”, however, it believes “optimized margins are far higher”. Hedge funds that reduced their stake in Mondelez International during the first quarter included Ray Carroll‘s Breton Hill Capital, which reduced the size of its holding down by 15% to 35,633 shares.

Zoetis Inc (NYSE:ZTS)

 – Shares Owned by Pershing Square (as of December 31): 41.82 Million

– Value of Pershing Square’s Holding (as of December 31): $2.00 Billion

– Q1 Return: -7.3%

Zoetis Inc (NYSE:ZTS) has been one of the best performing equity picks of Pershing Square since the fund initiated a stake in the company in July 2014. According to the fund’s presentation, Zoetis Inc (NYSE:ZTS)’s stock was trading up by 33% from the fund’s average purchase price as of April 21 and Mr. Ackman’s firm continues to own 41.82 million or 8.4% of the outstanding shares of the company. In its presentation, Pershing Square highlighted how the Comprehensive Operational Efficiency Initiative that the company launched last year has delivered quick results, helping Zoetis lower its currency adjusted SG&A expenses by 7% year-over-year and its R&D expenses by 9% year-over-year, during the fourth quarter. Due to the significant progress displayed by the company in the past few quarters, Pershing Square elected to not re-appoint its investment team member Bill Doyle for another term as a Director on the company’s board. For the first quarter, analysts are expecting Zoetis Inc (NYSE:ZTS) to report EPS of $0.41 on revenue of $1.10 billion, the same numbers that it reported for the same quarter of the previous year. William Von Mueffling‘s Cantillon Capital Management upped its stake in Zoetis Inc by 173% during the fourth quarter.

We share Pershing Square’s thoughts on Air Products & Chemicals, Valeant, and Herbalife on the next page.

Air Products & Chemicals, Inc. (NYSE:APD)

 – Shares Owned by Pershing Square (as of December 31): 20.55 Million

– Value of Pershing Square’s Holding (as of December 31): $2.67 Billion

– Q1 Return: 11.4%

Moving on, Pershing Square’s largest equity position on December 31 was Air Products & Chemicals, Inc. (NYSE:APD), which has also been its best performing stock pick this year and its only notable winner during the first quarter. At the end of last year, the fund held 20.55 million shares, equal to 9.51% of the company’s outstanding shares. The fund believes that Air Products & Chemicals, Inc. (NYSE:APD)’s CEO Seifi Ghasemi has done a remarkable job in transforming the company and will continue doing so in the future. It believes that over the longer term, Air Products & Chemicals can “grow EPS at a low- to mid-teens growth rate for years to come.” Moreover, Pershing Square feels that the company made the right decision by announcing the spin-off of its non-core materials technology business, Versum Materials, which is expected to be completed by the end of September of this year. For the first quarter, Air Products & Chemicals reported EPS of $1.82 on revenue of $2.27 billion, beating analysts’ consensus EPS expectation of $1.81 but missing on their revenue estimate of $2.38 billion. Philip Hilal‘s Clearfield Capital initiated a stake in the company during the first quarter, purchasing 250,100 shares.

Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

 – Shares Owned by Pershing Square (as of December 31): 16.59 Million

– Value of Pershing Square’s Holding (as of December 31): $1.69 Billion

– Q1 Return: -74.1%

Valeant Pharmaceuticals Intl Inc (NYSE:VRX) was the only stock in which Pershing Square reduced its stake during the final quarter of 2015, by 15%. However, it still owned a nearly 9% stake in the company (including options), as of April 21. According to Pershing Square’s presentation, the fund started buying Valeant’s stock at $161 per share and, as of April 21, the stock was trading down by 83% from the fund’s average purchase price of $196 per share. Despite that tumble, Pershing Square still hasn’t given up on the company, highlighting in its presentation how it has been working with it to protect its investment. After the disastrous earnings the company reported on March 15, Mr. Ackman joined the company’s Board and has been instrumental in making a number of changes, which included the appointment of Perrigo Company plc Ordinary Shares (NYSE:PRGO)’s former CEO, Joe Papa, as the new CEO of the company. Considering Mr. Papa’s brilliant track record at Perrigo, Pershing Square feels that he will be able to turn around Valeant Pharmaceuticals before long. However, most analysts and brokerages don’t necessarily share that view. On May 3, analysts at Rodman & Renshaw reiterated their ‘Buy’ rating on the stock, but lowered their price target on it to $102 from $105. Hedge funds that initiated a stake in the company during the first quarter included Anders Hallberg and Carl Bennet‘s HealthInvest Partners AB, which bought 370,000 shares of the company.

Mr. Ackman Remains Resolute on Herbalife Ltd. (NYSE:HLF)’s Downfall

Pershing Square has been bearish on Herbalife Ltd. (NYSE:HLF) for a long time, taking out a billion dollar short position on the company a few years ago. Though in its presentation, the fund didn’t share the size of its current short position in the stock, it did reveal that as of April 21, Herbalife Ltd. (NYSE:HLF)’s stock has appreciated by 28% from the average price of its short position (inclusive of dividends). According to Pershing Square, the FTC, which is still investigating the company, won’t give it a “‘slap on the wrist’ and the company will fail to survive” if the courts applied the same restrictions to Herbalife which they have imposed upon Vemma. Through membership data disclosed by Herbalife over the years, Pershing Square highlighted how the company’s membership growth has plateaued and that its new gross member additions are on the decline. The fund cited the company’s weakening financial results as proof that its business is struggling. It also highlighted how despite Herbalife’s weak operating performance, the company’s stock rose by over 40%  in 2015, solely due to P/E expansion. Speaking to CNBC on May 2, Mr. Ackman said that Herbalife’s business “has deteriorated dramatically” and urged the company’s employees to leave their jobs. David Kowitz and Sheldon Kasowitz‘s Indus Capital raised its stake in Herbalife during the first quarter by 44% to 3.17 million shares.

Disclosure: None