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 Domino’s Pizza, Inc. (NYSE: DPZ) and discussed its stance on the firm. Domino’s Pizza, Inc. is an Ann Arbor, Michigan-based restaurant company with a $17.8 billion market capitalization. DPZ delivered a 26.37% return since the beginning of the year, while its 12-month returns are up by 14.43%. The stock closed at $487.23 per share on September 27, 2021.
Here is what Pershing Square Holdings has to say about Domino’s Pizza, Inc. in its Q2 2021 investor letter:
“In March, PSH initiated an investment in Domino’s Pizza. Domino’s is the number one pizza company in the world and, along with its franchisees, operates more than 18,000 stores globally. As 98% of the system is franchised, the company generates most of its profi ts from high-margin brand royalty fees, and the balance from company-owned stores and a supply chain business that supplies North American franchisees.
We have long admired Domino’s due to its compelling customer value proposition, best-in-class digital infrastructure, consistent track record, exceptional unit economics and world-class management team. Domino’s menu in the U.S. has featured its core $5.99 and $7.99 everyday value platforms for more than a decade, which are amongst the lowest-cost meals for a family of four. The company generates 75% of its sales through digital channels – by far the highest in the industry. Ownership of the leading digital and delivery infrastructure enables Domino’s to consistently deliver an outstanding customer experience as well as attractive economics to drivers, franchisees, and shareholders, all without using third-party delivery providers in the U.S. This strong value proposition and effi ciency have led to consistent same-store sales growth of highsingle-digits in the U.S., and mid-single-digits internationally.
The simplicity and effi ciency of the company’s operations drive some of the strongest store-level economics in the restaurant industry, making Domino’s an attractive business opportunity for franchisees around the world. Many Domino’s franchisees were former drivers and restaurant employees, a track record which helps the company to recruit new employees in a diffi cult market for labor while also providing a path to entrepreneurship and wealth for its entry-level employees.
Domino’s franchised new stores generate pretax cash-on-cash returns of over 50%. Despite its signifi cant market share gains over the last decade, Domino’s has a long runway for growth as it represents only 17% of global quick-service restaurant pizza sales – far less than the market share leader in other categories such as burgers, chicken, and coff ee – and competition remains fragmented. These exceptional unit economics combined with a large market share opportunity underpin the company’s historical and projected unit growth of approximately 7% annually. Domino’s is led by a strong management team with an unwavering commitment to its goal of becoming the dominant pizza company in the world. The company has a demonstrated track record for shareholder-friendly capital return, which helps drive long-term earnings growth…” (Click here to see the full text)
Based on our calculations, Domino’s Pizza, Inc. (NYSE: DPZ) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. DPZ was in 31 hedge fund portfolios at the end of the first half of 2021, compared to 29 funds in the previous quarter. Domino’s Pizza, Inc. (NYSE: DPZ) delivered a 4.35% 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.
