Billionaire Bill Ackman Was Loving Air Products & Chemicals, Inc. (APD) In Q2

Pershing Square, managed by billionaire Bill Ackman, has been mocked quite a bit this year for its short position in Herbalife Ltd. (NYSE:HLF) but the fund did generate positive returns after fees in the first half of 2013. Furthermore, Ackman’s success in activist investments such as Canadian Pacific Railway Limited (USA) (NYSE:CP) makes him well worth following for initial ideas.

We track quarterly 13F filings from hundreds of hedge funds, including Pershing Square, as part of our work researching investment strategies; the most popular small cap stocks among hedge funds generate an average excess return of 18 percentage points per year, according to our research (learn more about our small cap strategy) with our own portfolio based in these results beating the market by 33 percentage points in the last 11 months. While Pershing Square generally manages a concentrated portfolio, according to Pershing Square’s most recent 13F and our database here are three trades Ackman was making in the second quarter of 2013 (see a history of the fund’s stock picks):

Air Products & Chemicals. One of the recent big activist moves from Pershing Square has been the fund taking a stake in Air Products & Chemicals, Inc. (NYSE:APD); it reportedly owns a 10% stake in the $21 billion market cap industrial gases and chemicals manufacturer. Ackman and his team have suggested that the company is undervalued due to potential operational improvements, rather than proposing a sale or breakup. The stock trades at 21 times trailing earnings, so the market has already priced in some improvement either based on the industry or on expected upgrades to operations; recent reports show little change in operating income after adding back special items. At the end of March, Edgar Wachenheim’s Greenhaven Associates had been the largest shareholder in  Air Products & Chemicals, Inc. (NYSE:APD) out of the filers we track, with a position of 3.8 million shares (research more stocks Greenhaven owned).        

Selling General Growth. While General Growth Properties Inc (NYSE:GGP) remained one of Ackman’s top picks, he reduced his holdings of the shopping mall and retail property real estate investment trust by about 10%. Earlier this year the company increased its quarterly dividend payment, and now pays a yield of 2.5%; real estate investment trusts pay out a large share of taxable income to shareholders in order to maintain their tax-advantaged status. This yield is in line with that of other retail REITs, but is not particularly high and so General Growth Properties Inc (NYSE:GGP) is really more of a way to play brick-and-mortar retail.

Selling Mondelez. Following the breakup of Kraft, Pershing Square had taken a position in Mondelez International Inc (NASDAQ:MDLZ). Spinouts can sometimes be profitable investment opportunities as management becomes more able to focus on operations, and billionaire Nelson Peltz’s Trian Partners has bought up shares of both Mondelez International Inc (NASDAQ:MDLZ) and PepsiCo, Inc. (NYSE:PEP) as part of a plan to merge the two companies (find Peltz’s favorite stocks). Between April and June, however, Pershing Square dumped its entire position in the snack foods company. Mondelez International Inc (NASDAQ:MDLZ), as with many food stocks, has been bid up to a valuation of above 20 times trailing earnings, and of course some of this has been driven by speculators hoping that Pepsi will outright acquire the company.

We’re not particularly excited about shopping malls and similar retail opportunities, and so wouldn’t expect great performance in the future from General Growth Properties Inc (NYSE:GGP). Peltz’s work with Mondelez and Pepsi is worth following, but so far Pepsi seems averse to an acquisition and so we wouldn’t be joining the Mondelez bulls in buying the stock at its current price. Ackman’s past success in Canadian Pacific means we can’t dismiss his move into  Air Products & Chemicals, Inc. (NYSE:APD), and while the stock seems expensive the business has been growing its sales at a decent clip. If it could hold down growth in its costs then the company could have some upside and so we would keep an eye on Pershing Square’s conversations with management there.

Disclosure: I own no shares of any stocks mentioned in this article.