Billionaire Bill Ackman has invested 37% of his portfolio in two brilliant stocks

By | March 27, 2024

Billionaire Bill Ackman runs the hedge fund Pershing Square Capital Management. It delivered a total return of 212% over the five-year period ending February 2024, easily outperforming S&P500, which increased by 99% over the same period. That makes him a good case study for aspiring investors.

With that in mind, as of the December quarter, Ackman had split 37% of its $10.4 billion portfolio between two companies. Alphabet (NASDAQ: GOOGL) (NASDAQ: GOOG) accounting for 19% of its invested capital, and Chipotle Mexican Grill (NYSE:CMG) good for 18%. That position statement calls for a high degree of conviction.

Here’s what investors need to know about these two brilliantly successful companies.

1. Alphabet

Alphabet reported solid fourth-quarter results, exceeding expectations on both the top and bottom lines. Total revenue rose 13% to $86.3 billion thanks to particularly strong revenue growth in the cloud computing segment. Meanwhile, GAAP net income rose 52% to $20.7 billion as cost control efforts led to a 300 basis point increase in operating margin. Investors can expect similar sales growth in the coming quarters, although earnings growth will undoubtedly slow.

Alphabet subsidiary Google has a sustainable competitive advantage in its ability to extract data from the Internet. Specifically, the company owns 15 products that serve at least 500 million users, and six products that serve more than 2 billion users. That includes internet search engine Google Search, streaming platform YouTube, the Android mobile operating system and the Chrome web browser.

The result is that Google dominates the digital advertising market because it has a deep understanding of consumer behavior that media buyers find valuable. According to Statista, the company accounted for 39% of digital ad spend last year. Google is working to strengthen its position by infusing its ad tech ecosystem with new artificial intelligence (AI) capabilities, including the recent addition of generative AI capabilities to Google Search.

Meanwhile, Alphabet has been steadily gaining market share in cloud computing thanks to investments in product development and go-to-market capabilities. Google Cloud Platform accounted for 11% of cloud infrastructure and platform services revenue in the fourth quarter, up one percentage point from the previous year. Google is still leading the way Amazon And Microsoft by a wide margin, but the recent release of Gemini could help the company gain more market share.

Gemini is a machine learning model that the company claims can outperform GPT-4 (the engine behind ChatGPT Plus) in a range of benchmarks. Gemini lets Google Cloud customers build AI applications such as conversational chatbots and intelligence search agents. Gemini also integrates with Google Workspace applications to automate tasks such as composing content in Google Docs, synthesizing data in Google Sheets, and generating images in Google Slides.

Going forward, Wall Street expects Alphabet to grow revenue 10% annually over the next five years, but that estimate remains positive if the company only maintains its market share in advertising and cloud computing. I say this because digital ad spending is expected to grow 15% annually through 2030, and cloud computing revenue is expected to grow 14% annually over the same period.

However, the current valuation of 6.4 times sales seems reasonable, even if the Wall Street consensus is correct. Patient investors should feel comfortable buying this growth stock today, but I would be much more conservative in position sizing than Bill Ackman.

2. Chipotle Mexican Grill

Chipotle looked strong in the fourth quarter, despite a challenging environment for many restaurant industry peers. The fast-casual restaurant chain’s revenue rose 15% to $2.5 billion, operating margin rose 80 basis points to 14.4%, and non-GAAP net income rose 25% to $10.36 per diluted share. Driving that success was strong same-store sales growth of 8.4%, driven by pricing power and a 7.4% increase in footfall.

These numbers are truly impressive in context. According to the National Restaurant Association, the average restaurant saw same-store sales increase by just 1.1% in December, while customer traffic fell by 1.7%. That means Chipotle brought in more people while the average competitor lost business, something the company does regularly. That’s a testament to the brand authority Chipotle has cultivated through its “food with integrity” strategy.

Expanding on this further, Chipotle uses only responsibly sourced meat (no hormones or antibiotics) and organically grown produce, and uses only real ingredients (no preservatives or artificial flavors). The company is also committed to fresh ingredients, which means no freezers, no can openers and no microwaves, according to CEO Brian Niccol. That strategy has helped Chipotle differentiate itself from other quick-service restaurants.

Unfortunately, not every brilliant company also qualifies as a great investment. Wall Street expects Chipotle to grow earnings per share 20% per year over the next five years. That consensus estimate makes the current valuation of 65 times earnings look quite expensive. Frankly, investors who want a piece of this company should be prepared to pay a premium, but personally I’d wait for a cheaper entry point before buying shares.

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennevine has positions at Amazon. The Motley Fool holds positions in and recommends Alphabet, Amazon, Chipotle Mexican Grill, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.

Billionaire Bill Ackman has invested 37% of his portfolio in two brilliant stocks, originally published by The Motley Fool

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