Pershing Square Holdings, Ltd., an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. For the first half of 2021 and year-to-date through August 17, 2021, the Company’s NAV per share, including dividends, increased by 7.3% and 5.8%, respectively, and the Company’s share price increased by 4.7% and 2.0%, respectively, compared with the S&P 500 which returned 15.2% and 19.5% over the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Pershing Square Holdings, the fund mentioned Chipotle Mexican Grill, Inc. (NYSE: CMG) and discussed its stance on the firm. Chipotle Mexican Grill, Inc. is a Newport Beach, California-based restaurant company with a $51.4 billion market capitalization. CMG delivered a 32.12% return since the beginning of the year, while its 12-month returns are up by 45.22%. The stock closed at $1,899.50 per share on September 27, 2021.
Here is what Pershing Square Holdings has to say about Chipotle Mexican Grill, Inc. in its Q2 2021 investor letter:
“Chipotle’s track record of superb performance has continued in 2021, driven by ongoing strength in digital sales and a recovery of in-store ordering. Digital gains achieved during the pandemic have proven resilient, with digital sales growing 11% in Q2 compared with the prior year, highlighting the limited overlap with in-person occasions. The company has now recovered about 70% of its pre-pandemic in-restaurant sales volumes, with the opportunity to drive these sales meaningfully higher once more schools and workplaces reopen after Labor Day. Near-term performance is accelerating, with management forecasting same-store sales growth from 2019 levels in the low- to mid-20% range in Q3, up from 18% growth last quarter.
In May, Chipotle announced that they would increase hourly wages to a national average of $15 by the end of June, and advertised a path for a new employee to earn an annual income of $100,000 in as little as three and a half years. This resonated extremely well with existing and prospective employees, with staffi ng levels now above 2019 levels following some previously pronounced labor shortages that limited sales. Chipotle increased menu prices by 3.5% and 4.0% to cover the wage increase, and has not seen any customer resistance, demonstrating the signifi cant pricing power enabled by Chipotle’s brand strength and attractive customer value proposition.
During the second quarter, Chipotle exceeded its 2015 peak average restaurant sales of $2.5 million, a signifi cant milestone in the company’s transformation under the current management team. Management is confi dent in the growth strategies that will take Chipotle to the next leg of its journey – $3 million in average restaurant sales. Key levers to achieve this objective over the next several years include: (1) disciplined menu innovation, with smoked brisket to come following the successful launch of the quesadilla, (2) data utilization from the company’s 23-million-member loyalty program, (3) throughput improvements as employees and customers reacclimate to in-person ordering, and (4) the expansion of the Chipotlane digital
drive-thru format to a higher percentage of the store base. Longer-term, management sees the opportunity to drive average unit volumes substantially above $3 million while also more than doubling the store base to 6,000 restaurants.”
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Based on our calculations, Chipotle Mexican Grill, Inc. (NYSE: CMG) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. CMG was in 35 hedge fund portfolios at the end of the first half of 2021, compared to 41 funds in the previous quarter. Chipotle Mexican Grill, Inc. (NYSE: CMG) delivered a 19.42% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
