Here’s How Billionaire Bill Ackman’s Top Picks Performed In the Fourth Quarter

Known for his activism and long term views, Bill Ackman‘s Pershing Square is one of the best hedge funds in the world. In the first 11 months of 2015, Pershing Square Holdings lost around 21% net of all fees and since inception at the end of 2012, it is up by 21.8%, according to its last investor letter. Given Pershing Square’s widely followed status and Ackman’s investing acumen, let’s take a look at how Ackman’s top picks, which include Valeant Pharmaceuticals Intl Inc (NYSE:VRX), Air Products & Chemicals, Inc. (NYSE:APD), Canadian Pacific Railway Limited (USA) (NYSE:CP), Mondelez International Inc (NASDAQ:MDLZ), and Zoetis Inc (NYSE:ZTS), performed in the fourth quarter.

Why do we track 13F filings of hedge funds and other institutional investors? The reason is simple: we analyze the equity portfolios of these funds and identify trading opportunities. However, we mainly focus on their small-cap picks, which, as we have determined, can provide the highest returns. According to our backtests covering the period between 1999 and 2012, the 15 most popular stocks among hedge funds generated around 81 basis points of alpha per month on average (see the details here).

#5 Zoetis Inc (NYSE:ZTS)

Shares held (as of September 30): 41.82 million
Total Value (as of September 30): $1.72 billion
Percent of Portfolio (as of September 30): 12.35%

Zoetis Inc (NYSE:ZTS)’s stock gained 16.37% in the quarter, making the animal health drug company the best performer of Ackman’s top five picks. Animal health is a growing area, with the global animal health market expected to grow to over $33 billion by 2020 from the current $23 billion now. It’s also a pretty stable market, as demand for meat and milk and the drugs required to supply the meat is pretty inelastic. The demand for pet health products will only grow as more emerging market citizens discover the joys of owning a pet. Because of cost cutting, Zoetis’ margins are creeping higher, and the company has beaten analyst earnings expectations every quarter last year. Zoetis is also expanding, having recently completed a $765 million acquisition of Pharmaq, a maker of farmed fish vaccines and drugs.

In his last investor letter, Ackman said:

“Aquaculture is the fastest growing segment of the global animal health industry and is the only segment in which Zoetis had limited presence. The PHARMAQ acquisition provides a market-leading portfolio of vaccines and pharmaceuticals for farmed fish as well as a late-stage development pipeline anticipated to deliver important new vaccines and next-generation parasiticides in the near term. PHARMAQ 10 is a good strategic fit with Zoetis, and provides another pillar for long-term growth. The company believes this acquisition will enjoy a long period of sustainable growth in revenue, profits, and cash flow when added into its business.”

Ackman isn’t the only fund with substantial holdings in Zoetis. A total of 60 funds from our database owned about 20.8% of the company at the end of September, including Cliff Asness’ AQR Capital Management and Barry Rosenstein’s JANA Partners.

#4 Mondelez International Inc (NASDAQ:MDLZ)

Shares held (as of September 30): 43.37 million
Total Value (as of September 30): $1.82 billion
Percent of Portfolio (as of September 30): 13.02%

Consumer staple Mondelez International Inc (NASDAQ:MDLZ) had a pretty solid fourth quarter too, with its stock surging by more than 7%. The company is reducing its costs, with management well on its way in implementing a $3.5 billion cost-cutting strategy to be completed by the end of 2018. Although Ackman would ideally like to see the company sold at a nice premium to a suitor like Kraft Heinz Co (NASDAQ:KHC), management is doing the next best thing by considering selling the company’s European cheese and grocery business for now. Nevertheless, Ackman is bullish on Mondelez and considers it a “a classic Pershing Square investment in a high quality, simple, predictable business with attractive long-term growth, and multiple opportunities to create shareholder value,” according to his investor letter.

“We maintain our belief that the opportunity for productivity improvement and margin expansion at Mondelez is vast – the largest in the large cap consumer packaged goods sector. The company’s operating profit margins were 12% last year, and are estimated to be roughly 14% in 2015, well below what they can or should be given the company’s attractive categories, dominant brands, and enormous scale,” Ackman added.

Perhaps following Ackman’s lead (Mondelez is a new position for Ackman), other hedge funds have been snapping up Mondelez International Inc (NASDAQ:MDLZ) too, as the number of funds owning shares of the company rose by 20 to 69 between July and September.

#3 Canadian Pacific Railway Limited (USA) (NYSE:CP)

Shares held (as of September 30): 13.94 million
Total Value (as of September 30): $2 billion
Percent of Portfolio (as of September 30): 14.35%

Canadian Pacific Railway Limited (USA) (NYSE:CP) was the second worst performer of Ackman’s top picks for the fourth quarter, as lower commodity prices, softer economic activity, and a weaker Canadian dollar sent shares of the railroad down 11.12%. After several straight years of solid stock performances due to rising operating margin and robust demand, it looks like the Canadian Pacific stock needs a couple quarters to consolidate its gains. Canadian Pacific is also trying to acquire Norfolk Southern, which Ackman believes will be profitable for shareholders of both companies.

“[…] CP’s proposed merger with NS would provide unsurpassed levels of safety and service to its customers and communities while also increasing competition and creating significant shareholder value. When one owns a company run by extremely able management, it almost always makes sense to get additional assets under their management if the new assets can be acquired at a fair price,” Ackman said.

A total of 39 funds among those we track owned shares of Canadian Pacific Railway Limited (USA) (NYSE:CP) at the end of the third quarter of 2015, down from 51 funds  at the end of the previous quarter.

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

Shares held (as of September 30): 20.55 million
Total Value (as of September 30): $2.62 billion
Percent of Portfolio (as of September 30): 18.79%

Air Products & Chemicals, Inc. (NYSE:APD) gained about 2% in the fourth quarter, making it the second best performer in Ackman’s portfolio. Despite the company reporting mixed fourth quarter results (with EPS beating estimates by $0.02 and revenue missing by $110 million), Air Products and Chemicals is a great long term holding given its wide moat. With a return on equity of 17.3% and a return on assets of 7.3%, Air Products and Chemicals earns admirable returns on capital and given the company’s cash flow and CapEx plans, its 2.75% dividend yield is safe. Moreover, last year, Air Products and Chemicals announced plans to spin-off its Materials Technologies business Versum, which will generate around $1.5 billion of capital that can be used for investment in Air Products and Chemical’s core business or returned to shareholders through buybacks.

“We believe that Versum can comfortably support its new capital structure given its strong free cash flow generation. At the one-year mark of [APD’s CEO] Seifi’s tenure at Air Products, we are delighted with the results achieved thus far and remain optimistic about the company’s future prospects,” Ackman said.

Hedge fund sentiment towards Air Products has been stable, with the number of funds long the stock almost unchanged at 77 at the end of the third quarter, versus 76 at the end of the second quarter. Ackman’s holdings in Air Products was also unchanged in the quarter.

#1 Valeant Pharmaceuticals Intl Inc (NYSE:VRX)

Shares held (as of September 30): 19.47 million
Total Value (as of September 30): $3.47 billion
Percent of Portfolio (as of September 30): 24.90%

With its stock falling from $178.38 at the end of September to $101.65 at the end of December, Valeant Pharmaceuticals Intl Inc (NYSE:VRX) was the worst performer in Ackman’s portfolio in the fourth quarter. Valeant’s troubles began on the back of price regulation concerns, and they became worse after Citron Research published a scathing report revealing Valeant’s questionable dealings with mail order pharmacy Philidor. Ackman nevertheless remains optimistic on the company, noting that other drug makers have had to pay large fines for questionable dealings also. He also considers that the stock’s decline increased the company’s intrinsic value, as Valeant conducted a series of small acquisitions.

“The result of these transactions and the related synergies increased our estimates for cash earnings to about $15.90 per share for 2016 and larger amounts in later years, substantially increasing our estimate of Valeant’s intrinsic value,” Ackman stated.

Therefore, Valeant does have a lot of inherent value, and many hedge funds outside of Pershing Square are also bullish on the stock. According to our data, 88 elite funds were long Valeant at the end of the third quarter, down from 98 funds at the end of the second quarter. Jeffrey Ubben’s ValueAct Capital owned 14.99 million shares at the end of September.

Disclosure: none