Bill Ackman is happy to buy stocks when he believes they’re on sale, and he holds them until their prices reflect what he believes are their true values. That could be a few months or it could be a decade. For example, Ackman established a position in Chipotle Mexican Grill more than eight years ago, and it has grown to become one of the largest positions in the portfolio of his hedge fund, Pershing Square.
Over the last two quarters, Ackman has built two new significant positions for Pershing Square — Nike(NYSE: NKE) and Brookfield(NYSE: BN) — piling an estimated $2.2 billion into those stocks during the third quarter alone. Here’s why.
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Ackman bought about $275 million worth of Nike stock in the calendar year’s second quarter, but he loaded up in the calendar year’s third quarter after Nike’s fiscal 2024 fourth-quarter earnings results and fiscal 2025 outlook disappointed the market back in late June 2024. Ackman added 13.2 million shares, spending over $1 billion based on its average share price during the quarter.
Nike has struggled lately as it manages what share direct-to-consumer sales should be of overall sales. Cutting off wholesale distribution in favor of its own stores and website has worked in some quarters but is not working as well lately and it’s forcing management to adjust. As a result, there was a near-term drop in revenue as its sales through big retail partners dried up while Nike shifted inventory to its own channels. Sales came in worse than expected and revenue fell 10% year over year in Nike’s fiscal 2025 Q1. In reporting the results, management guided for a slow recovery in sales due to economic uncertainty.
It’s worth pointing out, however, that its gross margin improved by 1.2 percentage points in fiscal Q1 on the back of streamlined product and warehousing spending and strategic price improvements. As Nike improves its inventory management and returns to sales growth, it should see strong improvements in both gross margin and operating margin over time.
Nike’s price-to-sales ratio of about 2.3 is near its 10-year low. And while sales are currently moving in the wrong direction, there’s good reason to believe things will turn around. Nike has one of the strongest brands in the world, China still presents a growth opportunity for its business, and it has been able to maintain its premium pricing. With earnings growth expected to rebound after this year, Nike could be a great stock to buy now and hold for several years while it works through its business model transition.
Brookfield is an investment firm that has its hands in many different businesses. It has an extremely strong track record, producing average compound annual returns of 18% for its shareholders over the last 30 years.
Ackman loaded up on about $285 billion of the stock in the second quarter and added roughly $1.2 billion more in the third quarter. Thanks to strong price performance since Ackman’s purchases, Brookfield is now Pershing Square’s largest stock position.
The company spun off its asset management business last year, but it maintains a 75% ownership stake in it. It also runs an insurance business (wealth solutions), and it owns several businesses across infrastructure, renewable energy, business services, and real estate. Brookfield expects to keep growing that portfolio over the next few years.
It seeks to buy companies where it believes it can unlock additional value through operational and capital improvements. It does that by taking the cash flow from its existing operations and deploying it wherever it sees investment opportunities.
Management expects its free cash flow growth over the next five years to compound at a rate of 20%-plus annually. If that prediction proves accurate, that would result in a whopping $47 billion of total free cash flow over that period, of which it plans to retain 75% ($36 billion) to allocate toward new investments. The rest, it intends to put toward share repurchases and dividends.
Shares currently trade for about 15 times distributable earnings. Management thinks the stock should trade for a multiple of 23 today, which suggests that investors are getting a healthy discount on shares. What’s more, it sees the growth in distributable earnings over the next five years giving the stock a fair value of $176 per share in 2029. That would amount to an average compound annual return of more than 25% over the next five years, based on the share price as of this writing.
Whether Brookfield can capitalize on the investment opportunities it seeks remains to be seen. Ackman seems to believe there’s a lot of growth ahead for the company, and it could produce the returns management is forecasting.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Brookfield, Brookfield Corporation, Chipotle Mexican Grill, and Nike. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
