The FTSE 100 has enjoyed a stellar September so far. Yet with the index rallying, it can make it harder to find good value stocks to buy. This is also compounded by the fact that the FTSE 100 contains the largest firms by market cap. This can mean it’s not easy to find a hidden gem.
So when I came across a stock that’s at a steep discount, even though it has risen by 7% over the past year, I wanted to dig deeper.
Unusual access to a hedge fund
I’m referring to Pershing Square Holdings (LSE:PSH).
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It’s quite a unique stock to be in the FTSE 100 because it’s a hedge fund. The company is based in the US and was founded back in 2004 by Bill Ackman. Given that the stock trades on the FTSE 100, even retail investors can get a piece of the action.
Typically, the smallest amount we need to directly get a hedge fund to manage our money is £100k. With the stock market, I can technically buy just one share for £3 and get exposure.
This works because the share price should have some correlation to the performance of the fund. For example, let’s say Pershing Square has a net asset value (NAV) of £100bn. This refers to the value of all the stocks, bonds and other assets the company holds. If Ackman buys a stock and nets a profit of £1bn, the NAV should jump to £101bn. As a result, I’d expect the share price to also rise.
Why the stock can trade at a discount
Pershing Square releases the NAV on a weekly basis and provides more detail in a monthly performance report.
However, just because the NAV is known, it doesn’t mean that the share price perfectly reflects this. In fact, at the moment there’s a 36% discount between the NAV and the stock price.
Simply put, the share price trades on investor sentiment. If people are optimistic about Pershing Square, the future of the fund and the market in general, the stock could easily trade at a premium to the NAV. When people are unsure about things and want to hold a defensive stock, a hedge fund simply isn’t the place to be.
I do understand that at the moment people are worried about whether the surge in interest rates is going to push the US and UK into a recession. Yet I believe the Pershing Square share price has been oversold relative to the NAV.
Points to remember
The relationship from the share price to the NAV isn’t an exact science. In reality, a stock can trade at a discount for years. So I need to be aware that even though I think it’s a value stock, it could remain cheap for a long time.
Another point to remember is that the NAV could fall. If Ackman and his managers make some bad calls over the next year and the NAV drops, the stock might only be at a 10% or 20% discount.
Even with these points in mind, I think that Pershing Square could be the best value stock on the index right now.
