How Were Pershing Square and Bill Ackman Preparing for 2013?

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At Insider Monkey, we track 450 of the world’s most elite hedge fund managers and our research has shown that over time, their best picks routinely outperform.  For more than a decade in our back tests, our strategy beat the market by 18 percentage points a year, and since we've started sharing these picks with the public, it has outpaced the S&P 500 by more than 20 percentage points in just six months (learn how to use this strategy yourself).

With this in mind, it's also crucial to look at each of the funds we track individually, and by using the latest round of fourth quarter 13F data from the SEC, we can determine how the hedgies were preparing for 2013. Let's take a look at one fund in particular: Pershing Square, managed by Bill Ackman. Here are his “fab five” stock picks, in order of first to fifth, and here’s his entire equity portfolio.

Sitting at No. 1 is Canadian Pacific Railway (NYSE: CP), clearly a darling for the activist fund manager.  Ackman increased his holdings in this railway giant from only 3.22% of his portfolio in 3Q 2011, to 21.01% of his holdings by the end of that year, most likely on the expectation that the Obama Administration would ax the Keystone XL pipeline. Since then, Ackman’s conviction has boomed even more, and the stock now comprises more than one-fourth of his entire equity portfolio.

Generally speaking, railroad players stand the most to gain if the pipeline is shelved, as the oil will have to find alternatives to getting to refineries in the U.S. Unfortunately, most analysts think that CP is overvalued and the technicals for this stock seem to agree. Still, since Ackman is known to trade almost exclusively on fundamentals, it appears that he is betting on Canadian oil taking the scenic route to the U.S., and it wouldn’t be a bad idea to consider this possibility playing out. Plenty of hedge fund managers were taking new positions last quarter, including Stephen Mandel and Joel Greenblatt; see the full list here

No. 2 in Ackman’s equity portfolio is Proctor & Gamble Co (NYSE: PG).  Since it’s nearly impossible to get ready for work in the morning without laying your hands on at least one P&G product—everything from soap to razor blades—the company seems almost recession-proof. Now, notable names Steve Shapiro and Robert Jaffe were a couple of the managers closing out their positions in P&G last quarter, as this may be a reaction to concerns that the company has over-extended itself, both in terms of new products and new markets. As a result, operating expenses are up and revenue is down, albeit slightly. The stock seems to have endured, however, and remains a buy among most analysts given its dominance in the consumer-product sector.

A staple in the Pershing equity portfolio comes in third: General Growth Properties, Inc (NYSE: GGP).  The company relied on cheap credit prior to 2008 for its expansion of shopping malls across the U.S., which ultimately led to a Chapter 11 filing.  After emerging from Chapter 11, General Growth shed some of its underperforming properties, but is still left with a few stragglers that appear to have weighed down the stock, combined with the fact that the economy is not exactly favorable to the construction of new malls, for example.  Ackman was rumored to be pushing for a sale of General Growth to Simon Property Group, but reportedly dropped his crusade after Brookfield Asset Management bought Pershing’s warrants in the company. Obviously, General Growth traded very erratically this year, but has gained more than 20% over the past twelve months.

No. 4 in this top five sits Beam, Inc. (NYSE: BEAM), which makes popular spirits such as Jim Beam Bourbon, Maker’s Mark, Courvoisier Cognac and Canadian Club Whisky. The outlook for Beam is a favorable one due to two factors: (1) a general bullishness in the bourbon-based marketplace, and (2) the company’s acquisition of Pinnacle vodka. While there has been no shortage of volatility this year in trading, the fundamentals are strong, as earnings showed a 37% improvement year-over-year in 2012.

Rounding out this top five is retailer J.C. Penney (NYSE: JCP). Plagued by sluggish sales despite very aggressive efforts to transform JCP into a type of “boutique” environment to appeal to younger consumers, the company’s stock price is down nearly 25% year-to-date, and doesn’t show any sign of improvement. While most of the blame is being placed on CEO Ron Johnson and the permabears are calling for a resignation, this outlook may be short sighted, as there’s still obvious support from the smart money, who likely have a longer time horizon. In addition to Ackman, Curtis Macnguyen and Murray Stahl are also bullish, and aggregate hedge fund interest did increase by 4%.

Ackman had his fingers in a range of investments heading into the New Year, and each—aside from General Growth Properties and J.C. Penney—sports fairly solid fundamentals. It’s obvious that the hedge fund manager’s investments in an undervalued real estate owner and a turnaround-focused retailer are a bit riskier, but each can pay off just as well in the long run. With his track record, investors should at least pay attention to these moves, while keeping an eye on what may come in the future.


This article is written by Amy Thielen and edited by Jake Mann. Insider Monkey's Editor-in-Chief is Meena Krishnamsetty.  InsiderMonkey has no position in any stocks mentioned. The Motley Fool recommends Beam and Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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