Ackman's Top Three Picks

Madhukar is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Bill Ackman is a long-term value investor who owns the hedge fund “Pershing Square Capital Management' with a total value of ~$8.9 billion as on Sep '2012. Ackman is known for his activist approach and special situation investments. Recently he is in news for betting against the stock of Herbalife and saying that the company is a 'pyramid scheme' and its stock should fall to zero. Similarly, earlier last year he won a proxy contest at the Canadian Pacific Railway which helped him to replace the top management. The fund has a concentrated portfolio and Ackman often invests in a handful of companies only. It mainly focuses on the consumer defensive stocks which comprise of ~40% of its portfolio. In today's article I have picked up the top three stocks from this hedge fund holdings.

<table> <tbody> <tr> <td> <p><strong>Companies</strong></p> </td> <td> <p><strong>% of Fund's Portfolio</strong></p> </td> <td> <p><strong>No of Shares</strong></p> </td> </tr> <tr> <td> <p><strong>Canadian Pacific Railway</strong> <span class="ticker" data-id="206917">(NYSE: <a href="">CP</a>)</span></p> </td> <td> <p>22.5%</p> </td> <td> <p>24 million</p> </td> </tr> <tr> <td> <p><strong>Procter & Gamble</strong> <span class="ticker" data-id="204975">(NYSE: <a href="">PG</a>)</span></p> </td> <td> <p>21.8%</p> </td> <td> <p>27 million</p> </td> </tr> <tr> <td> <p><strong>General Growth Properties</strong> <span class="ticker" data-id="203717">(NYSE: <a href="">GGP</a>)</span></p> </td> <td> <p>16.4%</p> </td> <td> <p>74 million</p> </td> </tr> </tbody> </table>


Canadian Pacific Railway's stock outperformed a majority of its rivals with a whopping return of around 60% in the last one year. This was mainly driven by the growth in the volume of petroleum products. The shares also picked up momentum on the announcement of the company's plan to cut down its workforce by 4500 jobs by 2016. The investors seem to like the company's initiative to drive down its costs as part of its reorganization strategy which is targeting at ~$1.4 billion in free cash flow annually by 2016.

Most recently, Phillips 66 announced a five-year deal with Global Partners to provide transportation and logistics services for 50,000 barrels of crude oil per day. It will be delivered from the Bakken region to the Phillips refinery in New Jersey via Global Partners’ facility in Albany, NY. This deal would be a key catalyst for Canadian Pacific’s volume expansion as it is the only provider of rail services on the route from Bakken to Albany,NY. The total contract for 91 million barrels would generate ~27000 carloads of crude oil for Canadian Pacific annually. Continuing the trend of 2012, this contract is a further enhancement for the company's rail volumes in 2013. I see this deal a highly positive factor for Canadian Pacific as it provides sustainability to the company's rail business because of the long-term nature of the contract. It will also help the company to achieve its target of ~70,000 carloads of crude oil transportation by rail annually, starting from 1Q13.

The company's future pipeline will be a booster to its volume and I believe Canadian Pacific will attain a revenue growth target of ~6% annually for the next two years.

Procter & Gamble has been always knows as a consistent dividend payer with an average dividend yield of ~3% in the last five years. The major driver behind this performance was its continuous innovation and expansion of brands over the time. However, in terms of growth the company has not been able to satisfy its investors in the recent years. Still, I feel Ackman’s holdings into this company's stock are reasonable at this point as its strategies have the potential to deliver a robust performance in the next one year.

  • P&G's 40-20-10 strategy was introduced along with its FY12 results. Under this plan, the company is targeting at 40 largest categories, 20 most exciting innovations and the 10 most important developing markets. This strategy also has focus on productivity improvements thus aiming at a savings of ~$10 billion by 2016. The company is already ahead of its schedule in this program with good productivity cost savings and I see this move as a booster to its bottom line in 2013.
  • In 2012, P&G adopted an aggressive pricing policy with ~4% increase which resulted in lower volumes across segments. However, this year the company is only planning for moderate rate hike of ~1-2% with a more balanced approach. I expect this strategy to generate organic sales growth of around 4% in 2013.

Even though the growth rate is slightly at the lower end, P&G's various initiatives will pull-back its growth to a higher level. At this point, I believe the investors should focus on the progress of the company's strategies and the consistency in its dividends.

General Growth Properties stock hit a recent low after the company's largest shareholder Brookfield Asset Management acquired the outstanding warrants held by Pershing Square Capital Management, its second largest shareholder. Prior to this deal, Pershing Square was trying to push around the sale of General Growth which was opposed by Brookfield leading to a disagreement between the two. However, the deal worth ~$271 million for 18.4 million common shares is now an end to the quarrelsome episode for the company and the shareholders. With the sale of warrants, Pershing Square will operate as a passive investor in General Growth and would avoid any takeover activity for the next four years which would remove any further speculations. I feel General Growth's stock could be weak over the next few weeks which could be a new buying opportunity for the investors, as the company’s long-term fundamentals remain intact. General Growth would now be able to clearly focus on its mall portfolio and solely execute its strategies.

Alongside, the company has been continuously selling off its poorly performing properties in order to renew its portfolio. The company has further plans to sell off  10-12 of its under-performing malls whose proceeds will be used to cut down the debt levels as well as to fund future developments. Moreover, the company has its focus on to refinancing to achieve interest rate savings. In 2012, the company completed ~$7.9 billion of refinancing which has reduced its interest expense by 1.1%. With further refinancing expected in 2013, there is a favorable financing environment for the company.

To sum it up, I feel the three stocks discussed above provide a great buying opportunity to the investors. Canadian Pacific and General Growth both have strong growth factors which would benefit the shareholders in the short as well as the long run. On the other hand, Procter & Gamble also has its strategies well-planned to regain its lost market share. I recommend a buy rating for these stocks.

madhudube has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus