Tuesday, September 24, 2013

How To Invest Like Bill Ackman

In some ways, Bill Ackman invests like he's riding a bicycle.

In the summer of 2012, Ackman joined fellow hedge fund manager Daniel Loeb and half-dozen other cyclists on a very long bike ride. Although Ackman, a fierce competitor, was admittedly out of shape for such a ride, he pulled out to lead the pack early, only to eventually fall well behind the others. One participant noted, "I've never had an experience where someone has gone from being so aggressive on a bike to being so hopelessly unable to even turn the pedals... (Ackman's) mind wrote a check that his body couldn't cash."  

Some activist investors like to start with a small position or take a "backseat" role, but Ackman starts out in high gear: He takes on management directly and generally looks for a board seat immediately. Ackman does all his research upfront -- as seen from some of his multi-hundred-slide presentations -- before taking a stake, and he has a goal in mind before even approaching management.

He's come a long way over the past decade, now that he's running Pershing Square Capital Management, a premier activist hedge fund. The general consensus is that he has a loud and outspoken personality -- though it's not always put that nicely -- but there's no denying that he tends to do fairly well as an activist investor.

Bill Ackman's Biography
Ackman's confidence dates to his high school days, where he wagered his father, a real estate executive, $2,000 that he would get a perfect score on the SAT. He didn't get a perfect score -- he missed only four questions -- but he also didn't lose any money, as his dad backed out of the bet the night before.

Ackman earned undergraduate and MBA degrees at Harvard University. While at Harvard, Ackman had the foresight and good fortune to take a class taught by Marty Peretz, who later provided half a million dollars in seed money for Ackman to launch his first hedge fund. After getting his MBA in 1992, Ackman teamed with former classmate David Berkowitz to form the Gotham Partners hedge fund.

     
   
  CNN Money  
  Ackman's come a long way over the past decade, now that he's running Pershing Square Capital Management  

Gotham failed a decade later after a bad investment in a golf course operator, but Ackman was back in the hedge fund world the following year, starting Pershing with a mere $54 million. His returns at Pershing have been so great that he has amassed a fortune of more than $1.2 billion, over half of which he plans to give away to charity as part of the Giving Pledge, in which Warren Buffett has taken a leading role.

The media has had a fascination with Ackman lately that has been nothing short of amazing. Vanity Fair's piece in March 2013 added fuel to the fire, painting Ackman as an extremely competitive, larger-than-life character. This competitiveness and his "smartest guy in the room" mentality have earned Ackman a number of critics among fellow hedge fund managers.

Bill Ackman's Investment Strategy And Big Wins -- And Losses
Ackman has taken activism to the next level, superseding some of his hedge fund cohorts by targeting high-profile large-cap companies. As any good deep value activist investor does, Ackman runs a niche portfolio, generally owning fewer than 10 companies, with a high concentration of his portfolio invested in his top two or three picks. 

One of Ackman's biggest wins came as Gotham Partners was closing. While winding down his first hedge fund, Ackman was also researching mortgage insurer MBIA (NYSE: MBI). Ackman challenged MBIA's triple-A rating, alleging that the company was guaranteeing untested asset-backed securities. His allegations drew the attention of New York's attorney general, who investigated Ackman for six months but eventually dropped the investigation. Ackman began shorting MBIA in 2004 at around $60 and rode the stock all the way down to $8 before closing out his short.

Another one of Ackman's biggest wins, and a stock he still owns, is General Growth Properties (NYSE: GGP). Ackman snatched up GGP shares for $0.35 back in 2008 when the mall operator was struggling to stay out of bankruptcy. Since then, the stock has made Ackman nearly 100 times his invesment.

Conversely, some of Ackman's biggest blunders have been in the retail space. This includes his latest half a billion-dollar loss on struggling retailer J.C. Penney (NYSE: JCP). Ackman sold his entire 18% stake in JCP after a public letter to the board calling for a new chairman caused immense backlash, and it became apparent that the retailer's issues might be more deeply rooted than in management alone. 

Other big blunders include Target (NYSE: TGT) and the now-bankrupt bookstore Borders. Ackman lost some 90% of his fund's Target investment after the financial crisis hit, sending Target's shares into freefall. Ackman was hoping to persuade Target to spin off the vast amount of property it owned into a real estate investment trust (REIT). Borders slipped into bankruptcy after Ackman was unable to find a buyer and his attempt to merge Borders with Barnes & Noble failed.

In his latest investor letter, Ackman notes that he and Pershing "have had three failures on the long side: Borders Group, Target, and J.C. Penney. Clearly, retail has not been our strong suit, and this is duly noted."

Bill Ackman's Portfolio: What's He Holding Now?

As of June 30, 2013. Pershing's position in APD is now more than twice what it was at the end of the second quarter, and the fund no longer owns JCP. 

Ackman and Pershing's largest position remains Canadian Pacific Railway (NYSE: CP). Back in 2011, Ackman launched a campaign to oust CP's CEO and install the former CEO of rival railroad company Canadian National. Ackman was successful, and the stock has been on a tear ever since, nearly tripling from his original investment. 

His second largest position is actually a combination of a call position and stock ownership in Procter & Gamble (NYSE: PG). Ackman got active in P&G in 2012 and immediately began pushing for cost cutting and overhead reduction; soon after, P&G's CEO stepped down. Ackman's key thesis is that P&G could see earnings per share (EPS) of $6 in fiscal 2016 and should trade upward of $120 by then, not bad considering he paid about $65 for the stock.

After returning only 12.4% net of fees in 2012, compared with the S&P 500's 16%, Ackman and Pershing are back with a vengeance, starting his newest activist campaign in Air Products (NYSE: APD). Ackman's multi-billion-dollar investment puts Pershing's ownership of Air Products at 9.8%. Ackman had hoped to funnel even more capital into the company, but the Air Products implemented a poison pill with a 10% threshold.

In a trade that has turned into a proverbial clash of the hedge fund titans, Ackman is still on the short side of Herbalife (NYSE: HLF) -- only the sixth short position in Pershing's history -- and it's estimated he could be down as much as $300 million on the trade. Ackman continues to stand by his short, defending it against major hedge funds on the long side, which include Carl Icahn and George Soros. Ackman built his short position in late 2012 after publicly calling Herbalife a pyramid scheme. Ackman has also launched a website and put together a 334-slide presentation to support his thesis. Ackman also engaged in a war of words during a half-hour CNBC segment with Icahn, who has said that Herbalife could turn out to be the mother of all short squeezes. 

Action to take --> Ackman's activist campaigns appear to have run their course for a number of his top holdings, including Canadian Pacific, General Growth and Beam (NYSE: BEAM). For investors looking to invest in stocks that could still benefit from Ackman's activist expertise, I would consider Air Products and Procter & Gamble. Ackman appears to be sticking with what he knows; one of his biggest wins of late was at Canadian Pacific, an industrial stock, and so it's no surprise his newest campaign is at yet another industrial company, Air Products. Both P&G and Air Products should also be big benefactors of a rebounding economy. If you really want to invest like Ackman, be on the lookout for next year's planned IPO of Pershing Square Holdings, which will allow investors to invest in Ackman's hedge fund through a shell company.

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