Many investors look back and regret not buying particular shares that have gone on to perform amazingly well. Or maybe, with the benefit of hindsight, they realise they sold one FTSE 100 stock far too early.
I know there are numerous shares I wish I’d bought and a fair few I should have kept hold of.
Sometimes though, I lament the fact that I didn’t fully embrace an opportunity with both hands. That is, I didn’t invest enough.
As Warren Buffett has said: “Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble.”
Right now, I’m thinking one FTSE 100 stock in my portfolio looks significantly undervalued. So, just in case I come to regret it, I’m considering making it a larger holding than it currently is.
A wide discount
The stock I’m talking about is Pershing Square Holdings (LSE: PSH), a listed vehicle for the hedge fund managed by Wall Street guru Bill Ackman.
Now, looking at the chart above, which shows the share price has risen around 165% in five years, I’d be forgiven for wondering why I think it’s undervalued at all. That’s a significant outperformance.
Well, despite this rise, the fund is trading at a massive 37% discount to the net asset value (NAV). And this is despite an active share buyback programme. Indeed, the company has repurchased $1.19bn of shares since 2017, yet the wide discount persists.
To me, this has left the shares looking extremely attractive, especially as Pershing Square has delivered an annualised NAV return of 22.6% over five years (up to the end of June). That is mightily impressive, though it doesn’t indicate future performance, of course.
The hedge fund’s holdings
The manager seeks out high-quality growth businesses trading at a sensible price that generate predictable, recurring cash flows. The portfolio is typically made up of between eight and 12 US-listed stocks
At the end of June, holdings included Chipotle Mexican Grill, Lowe’s and Hilton Worldwide. All are solid long-term picks, in my opinion.
Ackman’s newest position is Google parent Alphabet, initiated during Q1 when investors were fretting about ChatGPT’s potential impact on its search business. That holding is up around 40% already.
Additional strategies
As this is a hedge fund, there are naturally market strategies in place to provide protection to the portfolio.
Specifically, Ackman aims to guard against global ‘black swan’ events and other macro risks. He does this through complex financial instruments such as derivatives to offset risk (i.e. hedging). And he has a tremendous record of generating outsized profits during tough times.
For example, he made stonking returns during both the Great Financial Crisis and in 2020 at the onset of the pandemic.
My move
While I’m sorely tempted to buy more shares, I’m mindful that hedge funds use potentially riskier strategies to generate returns. They also often use gearing, which can magnify losses if the manager’s big bets backfire.
Additionally, Pershing Square’s portfolio is extremely concentrated. Meanwhile, there are high performance fees, which puts many investors off.
Therefore, I’d never make this stock a top-five holding in my portfolio. But I do feel comfortable aligning more of my money with Ackman’s fund, so I’m leaning towards increasing my holding. I think my future self might just thank me for it.
