Three Financial Insights Gleaned from Billionaire Bill Ackman's Possession of Chipotle Shares
Chipotle Mexican Grill (-0.32%) has been a significant holding for Pershing Square Capital Management, the fund managed by billionaire investor Bill Ackman. His fund initially invested in the stock during the second half of 2016, and it has since delivered substantial returns.
In total, Pershing Square bought 2.9 million shares worth approximately $1.1 billion. However, around 2.2 million shares were sold in subsequent quarters, bringing in around $1.9 billion. This leaves the fund with approximately 744,000 shares worth over $2.3 billion.
Besides these impressive returns, these successes can offer valuable investment lessons. Here are three that may help other investors replicate Ackman's success:
1. Be forward-thinking
Being forward-thinking doesn't always mean predicting the future or anticipating unusual events. It simply involves seeing where a company like Chipotle could go based on its past and that of similar businesses.
It was relatively easy to do this with Chipotle. When Ackman's fund first bought its shares, Chipotle had a 10-year track record as a public company and had expanded to over 2,000 restaurants. This provided enough information to determine whether the restaurant stock would become a underperformer like El Pollo Loco or a global success more like McDonald's.
McDonald's operates approximately 36,000 restaurants in more than 100 countries. While McDonald's operates under a franchise model, which is different from Chipotle's strategy of using company-owned restaurants, it still gives investors an idea of the potential expansion of a restaurant chain like Chipotle.
Today, Chipotle has grown to over 3,500 restaurants in five countries. Although it is far from matching McDonald's in size and scope, its growth has delivered significant returns.
2. Invest in what you're familiar with
Ackman also has a deep understanding of the restaurant industry, which makes it an interesting area to invest in.
Two of the seven stocks in the Pershing Square portfolio are restaurant operators. Chipotle, the largest holding, represents 20% of the fund's investments. Restaurant Brands International makes up another 17% of the portfolio.
This strategy, which has been championed by other successful investors like Warren Buffett and Peter Lynch, allows investors to leverage their strengths. By understanding an industry and its specific competitive environment, they can better understand how events or changes in a company's environment can impact its stock price.
Ackman likely used this strategy when he first invested in Chipotle shares. In July 2015, investors began selling the stock after an E. coli outbreak was linked to some of its restaurants. The ensuing customer and investor exodus drove the share price down by almost 50% over the next year.
As someone familiar with the industry, Ackman likely believed (correctly) that Chipotle would eventually overcome this challenge and that the stock would recover. It did more than recover; it surged higher over time.
3. Hold onto your winners
The final lesson is one that Ackman may or may not have followed - hang on to your winning stocks.
Pershing Square initially purchased around 2.9 million shares of Chipotle. However, starting from the third quarter of 2018, Ackman began selling shares. Except for a modest purchase in Q3 2021, he has been gradually selling a majority of his stake, reducing it to the approximately 744,000 shares the fund holds today.
Investors sell shares for various reasons. While Ackman may have hoped to reinvest the proceeds into more promising investments, Chipotle is currently the best-performing stock in the portfolio. The stock has risen by around 740% since the end of 2016, meaning Ackman's fund missed out on significant gains by not holding onto more of its shares.
However, investors should remember that selling a stock can be a complex decision. Many active stocks reached their peaks years or decades ago without a clear indication that they would return to their all-time highs.
Moreover, the remaining position may indicate that Ackman's fund is striking a balance between keeping winners and maintaining diversification. As mentioned before, Chipotle is just one of the seven Pershing Square stocks, making up 20% of the fund's holdings. The fact that the fund owns only seven stocks leaves it fairly undiversified. If the fund had not sold any Chipotle stock, the majority of Pershing Square's holdings would have been in a single company, making the fund overly dependent on Chipotle's performance for future returns.
Ultimately, winners tend to keep winning, and understanding an industry can help one identify a long-term winner from a short-term trend. Such knowledge may have influenced Ackman to hold onto some Chipotle shares and continue benefiting from its success.
Understanding Ackman's Chipotle investment
Ackman's investment in Chipotle stock demonstrates that he not only made a great investment but also provided valuable lessons for other investors.
Making a successful investment requires a forward-thinking approach, which involves assessing a company's growth potential and identifying trends. It also requires understanding an industry and the competitive environment. This knowledge can help investors identify opportunities and recognize when to hold on to their investments, rather than selling due to temporary setbacks.
While these principles may not turn an investor into a billionaire, they can help transform an investor into a shrewd, successful investor who can capitalize on opportunities as they arise.
After amassing significant returns from their investment in Chipotle Mexican Grill, Pershing Square Capital Management could potentially allocate some of their profits to other financial ventures related to finance and investing.
Moreover, considering Bill Ackman's track record of success in the restaurant industry, it might be interesting to observe his future investment decisions in this sector, as they could potentially yield similar results.
