Billionaire investor Bill Ackman hopes to follow in the footsteps of his longtime hero, Warren Buffett. He has even explored some ways to create a modern-day version of the company that Buffett currently runs, Berkshire Hathaway.
Ackman's investing style involves taking significant stakes in stocks he feels are meaningfully mispriced by the market. He typically holds stocks for a long period of time, often pushing management to make changes to help unlock value for shareholders.
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While most individuals can't directly invest alongside Ackman, they can copy his style by tracking his hedge fund, Pershing Square Capital Management. Ackman discloses his portfolio holdings every quarter with the Securities and Exchange Commission (SEC) and often provides additional disclosures via social media.
Currently, 44% of his $13 billion portfolio is concentrated in just three outstanding companies' stocks. Let's take a closer look at each one.
Ackman revealed a new position in Uber Technologies (NYSE: UBER) in February, finding shares priced attractively relative to the growth opportunity ahead of it. He argues many investors are overestimating the threat of autonomous vehicles to Uber. In fact, they could benefit the rideshare leader, which holds a dominant position as a network operator.
The network advantage of Uber is key, as it's able to aggregate demand for rides and properly balance supply and demand. That's a difficult task, especially for a company trying to maximize the utilization rate of its vehicles. As such, it makes a lot of sense for an autonomous vehicle company to partner with Uber to launch services in cities around the world. Ultimately, the proliferation of autonomous vehicles on Uber could drive down the cost it takes to use the service, increasing utility and demand.
In the meantime, Uber has done an excellent job producing strong free-cash-flow growth. The company generated $6.9 billion in free cash flow last year, up 105%. Management expects continued growth around 85% over the next two years, along with solid growth in earnings before interest, taxes, depreciation, and amortization (EBITDA).
Uber's share price sits roughly around where Ackman bought back in February. At just 22 times forward earnings estimates as of this writing, the stock looks very attractive considering management's long-term outlook for 30% to 37% annual EBITDA growth through 2026. Ackman believes the stock could double from here over the next three to four years.
Ackman first established a position in Alphabet (NASDAQ: GOOG) (NASDAQ: GOOGL) in early 2023. The stock had been hit hard over worries that artificial intelligence chatbots like OpenAI's ChatGPT would displace search queries, harming Alphabet's core Google Search business.
But Alphabet has proven AI is more of a tailwind for its business than a headwind. It integrated generative AI answers into search results, and rapidly worked to make its Gemini model more efficient. The efforts paid off, reducing the cost of AI Overviews in search results by 90% in 18 months, enabling it to expand the product to 100 countries by the end of last year.
And there's good reason Alphabet's going all in on Google's AI generated answers; they increase user engagement and satisfaction. Web browsers are now coming to Google to ask questions they haven't asked before thanks to AI Overviews. And management says it's monetizing those search queries at the same rate as non-AI generated search results.
The bigger driver, however, has been Google Cloud, which has seen strong demand for compute as businesses look to build new AI capabilities. Google Cloud revenue surged 30% last year. Management suggested it would have grown even faster, but it remains capacity constrained. Moreover, it's showing strong operating leverage with operating income for the segment climbing 256% year over year. And looking at larger competitors suggests there's more room to expand operating margins still.
Alphabet's stock has fallen to a forward P/E of just 17.4 during the current sell-off. That's a great opportunity to pick up shares at a valuation roughly in line with where Ackman first bought them.
Ackman first purchased shares of alternative asset manager Brookfield (NYSE: BN) in the second quarter of 2024. He added shares for three consecutive quarters, positioning it as a top holding for his hedge fund. Brookfield has an extremely complex corporate structure, but it's all to help unlock value for investors. That's highly aligned with Ackman's style.
For example, it offers investors the opportunity to own just its renewable energy investments through Brookfield Renewable Partners. It issued a common stock as well, Brookfield Renewable, for institutional investors that aren't allowed to buy partnership shares. Investors could also buy shares in Brookfield Asset Management (BAM), which is 73%-owned by Brookfield. It recently made BAM eligible for inclusion in U.S. indexes, which could further unlock shareholder value.
But Brookfield isn't just about financial gymnastics. It holds some great investments across its portfolio of renewable energy, infrastructure, real estate, and private equity. It also has a growing insurance business. Over the long run it expects to generate returns of 15% per year and strong free cash flow.
Management set a five-year target for $47 billion in cumulative free cash flow last September. Most of that will go toward reinvesting in more business opportunities while management will return the rest through strategic share repurchases. That should support strong earnings-per-share growth well above the investment returns produced by its portfolio.
Shares currently trade for about 12.3 times distributable earnings, which Ackman points out is well below comparable U.S. peers, despite similar cash-flow profiles. Shares have come down from their recent highs earlier this year, and now may be a great time to invest in the stock offering investors access to stable cash-flowing businesses.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Adam Levy has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, Brookfield, Brookfield Corporation, Howard Hughes, and Uber Technologies. The Motley Fool has a disclosure policy.
Billionaire Bill Ackman Has 44% of His Hedge Fund's $13 Billion Portfolio Invested in 3 Outstanding Stocks was originally published by The Motley Fool
