But that’s exactly why it can be so worthwhile to peek into the portfolio of Ackman’s firm, Pershing Square Capital Management.
Today, we’re taking a look at five of the firm’s favorite stocks for 2012.
To do that, we’re digging into his firm’s 13F. Institutional investors with more than $100 million in assets are required to file a 13F — a form that breaks down their stock positions for public consumption. From hedge funds to mutual funds to insurance companies, any professional investors who manage more than that $100 million watermark are required to file a 13F. And with more than $8 billion in equity alone under management, Pershing Square certainly fits that description.
Without further ado, here’s a look at five of his favorite stocks.
Citigroup
We’ll start off with the outlier, Citigroup. Last quarter, Pershing Square only added onto four positions in its portfolio — and Citigroup was the sole firm that Ackman and company have little chance of taking an activist role in. The firm took a bite-sized addition to its Citi stake, adding 4,750 shares in the most recent quarter. That puts Pershing Squares total position worth $267.6 million, or 11.8 percent of the hedge fund’s portfolio.
Citi hasn't exactly been the poster child for financial stability lately. The firm, like other big banks, still has a balance sheet that’s about as transparent as mud. But Citi has been distancing itself from other banks’ dramas lately, a big positive in a year that’s been full of government fines and trading losses. At the same time, Citigroup has been quietly raising its financial reserves, boosting its Tier 1 common ratio to meet increased restrictions.
Exposure to developing countries is one of the big differences that Citi offers investors. While most of its peers sought to escape the risks of those emerging markets, they fell right into the zero-interest rate traps in Europe and here at home. Because Citi can earn a wider spread on loans in growing countries, it’s been able to churn out some enviable performance lately.
By and large, I wouldn’t recommend loading up on shares of any big bank in 2012. That said, if you must, you could do worse than Citi right now.
Canadian Pacific Railway
The biggest position in Pershing Square’s portfolio is Canadian Pacific Railway , a $12.6 billion railroad that owns close to 15,000 miles of track that spans Canada and come of the Northeastern and Midwestern U.S. Ackman’s firm owns a $1.83 billion stake in Canadian Pacific, totaling 14.2 percent of the firm's outstanding shares, enough to earn Ackman seats on the board this year as well as a coup in selecting the firm’s CEO.
Canadian Pacific earns the lion’s share of its revenue by transporting commodities like coal, grain, and fertilizers, no great shock given the geographic location of CP’s tracks across Southern Canada. That’s attractive positioning because commodities tend to be more resilient to economic headwinds than other, more cyclical freight categories like industrial goods.
Canadian Pacific has tended to lag the rest of the Class I railroads in the last few years, putting up stagnant efficiency ratios while bigger railroads upped their financial performance. But with investments in fuel consumption and a push towards using longer trains, Canadian Pacific is well positioned to up its efficiency in the next few years.
Financially, the firm has felt some ill effects from having to maintain those thousands of miles of track: The firm has a lot more debt than its peers do. But that comparison is exacerbated by the fact that its peers have trimmed their own debt loads of late.
Despite the bigger debt load, CP should have no trouble covering its obligations with the amount of cash it generates.
Matson
Honolulu-based Matson got peeled off from its former parent Alexander & Baldwin earlier this year, creating two publicly traded companies: a real estate and agriculture firm and a shipping firm. Matson is the shipping side of the business.
The firm owns 17 vessels, around 47,000 shipping containers, and major shipping terminals in Hawaii and the West Coast of the mainland. In addition to being the dominant shipper in Hawaii, a business that’s critical for Hawaiian life, Matson has also spent the last few years building out a Chinese shipping business that’s kept the firm’s fleet busy. With crude costs falling right now, Matson should have the benefit of cutting costs for customer contracts while profiting from the lag between oil price drops and contract negotiations.
The firm may be one of Pershing Square’s smaller positions at $176.6 million, but it’s also one of the few small-cap stocks on Ackman’s “buy” list. The hedge fund manager picked up 82,930 shares in the most recent quarter, building his stake in Matson up to 8.71 percent of the company's total market cap.
J.C. Penney
It’s been a tough year for J.C. Penney shareholders, to say the least. Since the start of 2012, shares of the department store chain have slid more than 40 percent. (It was one of the 10 worst-performing S&P 500 stocks in the second quarter.) Still, Ackman is betting on shares in a big way this year. His fund owns close to 18 percent of shares after picking up 360,200 shares of Penney in the most recently filed quarter.
Hopes were high for Penney when the [now] mid-cap firm recruited Ron Johnson from a high profile retail job at Apple to head the beleaguered firm. But it seems like investors have already lost faith in Penney’s turnaround potential. Still, J.C. Penney has positive cash flow, a network of more than 1,100 stores, and a valuable (if tired) 110-year-old brand name that still draws traffic through its stores.
Retail is an extremely competitive business, and Penney didn’t enter 2012 with the best positioning to begin with. As new plans for merchandising, cutting debt, and advertising start trickling down to the firm's financial statements, investors who gutted it out are likely to see their patience rewarded. After all, sentiment is so bad in shares right now that there is value to be had. And activist investors like Ackman (a board member since 2011) want to see to it that the value gets realized.
Second-quarter earnings on Aug. 10 should be telling for Penney.
General Growth Partners
After J.C. Penney’s number-two spot on Pershing Square's portfolio comes General Growth Partners, a stock that’s had a very different year from the department store chain: Shares of General Growth Partners are up more than 14.5 percent so far in 2012, besting the broad market by a wide margin. General Growth Partners makes up $1.3 billion on Pershing Square’s portfolio, and the hedge fund owns 7.7 percent of the firm’s outstanding shares as a consequence.
General Growth Partners owns interests in approximately 170 regional shopping malls across the U.S., a business that provides the firm with a combination of consistent lease income and a smaller cut of retail sales at its properties. As a commercial REIT, it’s best to think of General Growth Partners as an income generation vehicle; the firm rents out stores using long-term triple-net leases that keep volatile expenses like taxes, insurance, and maintenance off of General Growth Partners’s list of responsibilities. That’s reflected in General Growth Partners’s 2.3 percent dividend yield right now.
Ackman was one of the most conspicuous backers of General Growth Partners back in 2009 and 2010 when the REIT was struggling to stay afloat (it went bankrupt in 2009). And so far, his investment has paid off in spades. Still, it remains the number-three position in his firm’s portfolio by size for a good reason: He thinks General Growth Partners’s got more to pay investors in 2012.
—By TheStreet.com Contributor Jonas Elmerraji
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