Billionaire Bill Ackman is the founder and CEO of Pershing Square Capital Management, a hedge fund that returned 183% in the five-year period that ended in June 2024. During the same period, the S&P 500(SNPINDEX: ^GSPC) advanced just 102%.
Ackman is no stranger to the public spotlight. His failures and successes have been widely chronicled by the media, including the $1 billion he lost betting against vitamin company Herbalife and the $2.6 billion he made in a matter of weeks during the pandemic.
Ackman's market-beating track record makes him a worthwhile case study. For instance, 37% of his Pershing Square portfolio was invested in two stocks as of the June quarter: 20% in Alphabet(NASDAQ: GOOGL)(NASDAQ: GOOG) and 17% in Chipotle Mexican Grill(NYSE: CMG).
Those stocks have been brilliant investments in the past. Both have roughly doubled the gains in the S&P 500 since Ackman first bought shares. Admittedly, he reduced his position in Alphabet and Chipotle by 16% and 23%, respectively, during the June quarter. Those are sizable cuts, but Ackman's current asset allocation is still a clear sign of confidence.
Alphabet: 20% of Bill Ackman's portfolio
Alphabet reported solid financial results for the second quarter. Revenue increased 14% to $84.7 billion and GAAP net income jumped 31% to $1.89 per diluted share. CEO Sundar Pichai said, "Our strong performance this quarter highlights ongoing strength in search and momentum in cloud." The only blemish was YouTube ad revenue, which narrowly missed estimates, causing the stock to sink.
Adding to the downward momentum was the recent ruling that Alphabet violated antitrust laws by paying billions of dollars to browser developers and smartphone makers to ensure Google was the default search option. For instance, Alphabet paid Apple about $20 billion in 2022 for default placement on the Safari browser and iOS devices, according to The Wall Street Journal.
Similar deals will likely be banned in the future, but the Justice Department is also weighing other options to reduce Alphabet's monopoly power. That includes a forced divestiture of its Chrome browser or Android operating system. Google Search is directly integrated with those products, which undoubtedly helped it become the dominant search engine.
Whispers about a possible breakup caused Alphabet shares to sink 3% on Wednesday, but investors are jumping at shadows. Google controls about 90% of the online search market, and it is the largest digital advertiser in the world. That dominance is built on expertise in search algorithms and artificial intelligence (AI), and it would not disappear if the company were forced to divest Chrome or Android.
Additionally, none of the legal cases pending against Alphabet target its cloud computing division, which should be an important growth driver as business ramp investments in AI. Forrester Research recently recognized Google as a leader in AI infrastructure solutions and large language models. Those strengths helped the company gain a percentage point of market share in the June quarter.
Going forward, Wall Street expects Alphabet to grow earnings at 16% annually through 2026. That makes its recent valuation of 23 times earnings look reasonable. Investors should capitalize on the recent drawdown and buy a few shares on the dip.
Chipotle Mexican Grill: 17% of Bill Ackman's portfolio
Chipotle also had a good second quarter. Revenue increased 18% to $3 billion on strong same-store sales, and non-GAAP net income jumped 36% to $0.34 per diluted share. CEO Brian Niccol said, "Our focus and training around throughput paid off as we were able to meet the strong demand trends with terrific service and speed."
Importantly, Chipotle once again bucked the contractionary trend facing the broader restaurant industry. Whereas the average restaurant reported a decline in same-store sales and customer traffic in the second quarter, Chipotle reported an 11.1% increase in same-store sales, reflecting 8.7% growth in transactions and 2.4% growth in check size.
Focus on throughput is one reason the company has been so successful. Employees are frequently retrained on fundamentals, and Chipotle has deployed new coaching tools and automation solutions. Those efforts are collectively moving people through the line more quickly, improving sales and customer satisfaction in the process.
More broadly, Chipotle has built brand authority with its "food with integrity" philosophy. The company sources only responsibly raised meats free from antibiotics and hormones, and it uses only fresh ingredients. That means no preservatives or freezers are involved. As a result, customers see Chipotle as a delicious and slightly healthier option than fast food alternatives.
Going forward, Wall Street expects Chipotle to grow earnings at 17% annually through 2026. That consensus estimate makes its recent valuation of 50 times earnings look a bit pricey, but investors may not get a much better chance to buy shares in the near term. The stock recently declined on news that CEO Brian Niccol will leave the company at the end of August to assume the CEO position at Starbucks. Investors interested in owning Chipotle should consider buying a small position today.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Apple, Chipotle Mexican Grill, and Starbucks. The Motley Fool recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
