Bill Ackman is one of the world's most famous investors. The CEO of Pershing Square Capital Management has been dubbed "Baby Buffett" in the past. And, among other things, he's known for turning $27 million into $2.6 billion in the early stages of the pandemic by buying hedges on bond prices crashing, which paid off when markets plunged in March 2020.
Ackman has made plenty of other successful investments, and one of his best stock purchases has been Chipotle Mexican Grill (NYSE: CMG), the fast-casual burrito chain. Currently, the high-flying restaurant stock appears to be Ackman's biggest holding after jumping 26% year to date, outperforming Alphabet, which was just ahead of Chipotle as his biggest holding at the end of the fourth quarter. However, Alphabet stock has only gained 12% this year, which has given Chipotle the lead.
Ackman started buying Chipotle in the third quarter of 2016, meaning he's gained nearly 600% on the stock since his first investment. The Pershing Square chief first bought Chipotle when it was still down from the E. coli scandal, calling it "extremely cheap," and he correctly bet on a recovery. Here's why he likes it.
A Chipotle in Sedona, Arizona. Image source: Chipotle.
Why Ackman likes Chipotle stock
Many of the chain's competitive advantages are self-evident, but Ackman has explained why he likes it by saying, "Chipotle is one of the best-positioned consumer companies for the current inflationary world." He also favors its straightforward business model, lack of debt, and that it owns all of its restaurants, unlike most fast-food chains.
With the exception of the few years when the stock was struggling in the aftermath of the E. coli outbreak, Chipotle has been a consistent winner. Its menu and concept have long been popular with customers, and it generates high margins with restaurant-level operating margins hovering near 30%.
The business has grown in recent years under CEO Brian Niccol by embracing concepts like drive-thrus (which it calls Chipotlanes) and leveraging the power of digital ordering and delivery, which it mastered during the height of the pandemic.
Meanwhile, the company continues to expand its restaurant base, taking advantage of the ample room for growth. It sees as many as 7,000 restaurants in North America, and it has roughly half that many now.
Will Ackman continue to hold Chipotle?
Ackman actually trimmed his position in Chipotle in the fourth quarter, selling nearly 129,000 shares to reduce his position to 825,000 shares. It's unclear why he reduced his position, but Chipotle's valuation could be one reason. The burrito chain's valuation has steadily increased in recent years as investors recognize the business' superiority and industry leadership.
Currently, the stock trades at a price-to-earnings ratio of 65, which is expensive for any stock, but especially for a relatively mature restaurant company. In order to justify that valuation, Chipotle will have to continue to deliver strong comparable-restaurant sales growth and margin expansion. That might not be so easy, and if the company falls short of those expectations, the stock could plunge.
Ackman is a fan of the restaurant industry, with a significant stake in Restaurant Brands International, the parent of Tim Hortons, Burger King, Popeyes, and Firehouse Subs. He owns only eight stocks, so he's not afraid to have a concentrated portfolio.
However, it wouldn't be surprising to see him continue to trim his position in Chipotle; he's not typically a long-term buy-and-hold investor, choosing instead to find new undervalued stocks like he did with Chipotle.
We'll get an update soon as hedge funds are due to report first-quarter activity by mid-May. Chipotle could officially be the biggest holding at Pershing Square, or Ackman's fund might be gradually selling it to rotate into more-undervalued stocks.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Jeremy Bowman has positions in Chipotle Mexican Grill. The Motley Fool has positions in and recommends Alphabet and Chipotle Mexican Grill. The Motley Fool recommends Restaurant Brands International. The Motley Fool has a disclosure policy.
