Pershing Square Holdings (LSE: PSH), run by billionaire hedge fund manager Bill Ackman, has been promoted to the FTSE 100. It will take its place among the UK’s blue-chip elite on 21 December.
Despite outperforming the market by a wide margin over the last couple of years, PSH continues to trade at a substantial discount to its net asset value (NAV). This suggests it could offer a wide margin of safety and significant upside potential. But should I buy?
Pershing Square deal
Let me start by nailing down some numbers. PSH’s NAV per share at the end of last year was 2,035p. It’s increased 61% to 3,268p as of 30 November. Meanwhile, the share price has gone from 1,454p to a current 2,485p — a rise of 71%.
As such, the discount of the shares to NAV (24%) has narrowed somewhat since the start of the year (29%). Nevertheless, if you’re buying the stock today, you’re paying just 76p for every £1 of PSH’s assets. On the face of it, this is a terrific deal. Particularly as the company has delivered a storming performance in a year of extraordinary turmoil.
Attractive qualities
Listed in London in 2017, Pershing Square invests principally in publicly traded US-domiciled companies. Ackman looks to take a significant minority interest in a relatively small number of “superb businesses” when they’re trading at a discount to their “intrinsic value.” And he aims to be “an influential and supportive owner.”
Ackman’s business-focused philosophy and concentrated portfolio chime with other investors I admire, like Warren Buffett, Terry Smith and Nick Train. On this basis, I think Pershing has inherently attractive qualities.
As last reported, it owns stakes in 10 companies, including Starbucks, Burger King-owner Restaurant Brands, hospitality group Hilton, and key players in the US mortgage market, Fannie Mae and Freddie Mac.
At this point you may be thinking: Hang on Henry, if PSH owns stocks like these, how on earth has it managed to produce such impressive returns? This is where things get a bit Twilight Zone-ish.
Pershing Square, but part Bermuda Triangle
Ackman does some weird stuff most private investors don’t get involved in. He’s a hedge fund manager, after all!
As my Motley Fool colleague Edward Sheldon explained in a recent article, Ackman turned $17m into $2.6bn from a bet against corporate debt earlier this year, just as the pandemic was unfolding. He then ploughed the proceeds into stocks, just as they began their big, post-crash rebound.
Ackman’s wizardry can produce some outsized returns, almost from nowhere. But assets can also disappear when his bets go wrong. He had a run of losses a few years ago from some bad calls, including a massive short position against nutritional supplements seller Herbalife.
Should I buy Pershing Square shares?
I like Ackman’s core philosophy of investing in superb businesses when they’re trading at a discount to their intrinsic value. And Pershing Square offers UK investors a one-stop shop to buy into a small, actively-managed portfolio of such businesses listed in the US.
But you also have to be aware that Ackman will make some big, idiosyncratic and often contrarian bets. I don’t see anything wrong with this per se. Not if you’re looking for a higher risk-higher reward investment. PSH certainly looks very buyable to me right now at its 24% discount to NAV.