Gain exposure to the highest quality businesses Pershing Square has owned
Thursday 16 May 2019 Author: James Crux

A 26.7% discount to net asset value (NAV) at Pershing Square (PSH), is a buying opportunity. The discount is wide because some investors lost faith following a poor performance since a high-profile 2014 launch on Euronext Amsterdam and subsequent 2017 London listing.

However, Shares likes the look of the quality underlying portfolio and believes a continuation of the more recent performance uptick offers a powerful catalyst.

Pershing Square is an investment trust that makes concentrated investments in North American-domiciled large cap companies.

This is an actively managed portfolio of high-quality companies with higher earnings growth than the S&P 500.

The portfolio is managed by Wall Street billionaire Bill Ackman’s Pershing Square Capital Management. Activist investor Ackman puts money to work in companies that generate relatively predictable, growing free cash flows with ‘formidable barriers to entry and a compelling value proposition’.

Think excellent businesses which are protected by large competitive moats and boast opportunities for improvement; common traits are high returns on capital, long-term growth trajectories, and unique and irreplaceable brands or other assets.

As an activist, Pershing often works directly with management to unlock value.

In early 2018, Pershing Square took steps to address a sub-par performance, actions which had a positive impact on NAV performance during 2018. NAV has also performed strongly into 2019 thanks to strong portfolio earnings growth.

Initiatives taken to narrow the discount include a May 2018 tender offer and share purchases by Ackman and other members of the Pershing Square management team, while the fund has also introduced a quarterly dividend in a bid to entice income seekers. It yields 2.3%.

As at 30 April 2019, there were 10 long positions and no shorts in the portfolio. The absence of shorts means there is merit in Ackman’s belief Pershing Square is best thought of as an investment holding company rather than a hedge fund.

Today, he insists ‘we own one of the highest quality collections of businesses we have owned since the inception of Pershing Square’.

The portfolio includes the likes of Restaurant Brands, generating high-margin royalties from the Burger King, Tim Hortons and Popeyes brands, coffee chain mega-cap Starbucks and tacos-to-burritos restaurant chain Chipotle Mexican Grill.

Other positions include property developer Howard Hughes, home improvement chain Lowe’s, Fannie Mae and Freddie Mac and global hotels and resorts giant Hilton Worldwide.

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