Bill Ackman may not be a household name in the world of investing, but he should be. For starters, he became a billionaire through the successful management of hedge funds and by concentrating his bets into a small handful of opportunities he thinks will pay off big. This was the case with mall operator General Growth Properties (NYSE: GGP), one his most successful turnaround stories, as he turned a $60 million investment into $1.1 billion, as I'll detail below.
Currently, Ackman is running Pershing Square Capital Management, a hedge fund that ended 2011 with a total market value of close to $8 billion. Ackman has been likened to billionaire investors such as Carl Icahn and Warren Buffett. He has striking similarities to Icahn in that he is more than willing to confront underperforming companies and agitate for change. In many instances, he has been successful in making changes that benefited not only his hedge fund investors, but also the shareholders of the public companies he targets. And like Buffett, he is willing to bet big on a hand full of undervalued stocks.
Below are three notable recent moves from Ackman's portfolio during the last quarter of 2011. You will be able find the trademarks moves of Icahn and Buffett, but also moves that are becoming unique to Ackman as he continues to distinguish himself is one of the "gurus to watch" on Wall Street.
Ackman's beef with Canadian Pacific
Ackman's largest position, at 21% of his portfolio, is currently in Canadian railroad operator Canadian Pacific Railway (NYSE: CP). He significantly increased his stake of 4 million shares from the end of the third quarter and now owns 24.2 million shares. This works out to a current market value of about $1.8 billion and around 14% of the entire company.
Ackman has been advocating for the replacement of CEO Frederic Green and an overall shakeup at the company to improve its operating performance. He recently presented his views to the company's shareholders and stated that Canadian's costs are rising faster than the competition. He also argued that the company lags in service quality, so it isn't able to charge higher prices because customers aren't willing to pay more for inferior railroad transportation and delivery times.
Ackman, in a move reminiscent of Carl Icahn, is also pushing to replace Canadian's board of directors for his own members. We'll see the outcome of his proposals when the company holds its annual shareholder meeting in May.
Canadian Pacific does look like it's in need of improvement. Its operating margin of 32.2% has fallen for the past five years and way behind the peer group average of 38.4%. Ackman wants to install a management team that can lower costs, better serve clients and eventually grow faster.
Improvements on the way at J.C. Penney
Ackman didn't increase his position in department store retailer J.C. Penney (NYSE: JCP) during the fourth quarter, but the company represents his second largest stake at about 17.5% of the portfolio, worth $1.4 billion. And while he hasn't been buying the stock recently, he installed his own management team in 2011, which is fast at work to improve the company's lagging performance.
As with Canadian Pacific, profitability at J.C. Penney has been lagging peers. So has its overall growth. In response, management has closed the catalog business and shuttered underperforming stores. The most notable move has been to appoint Ron Johnson, who spearheaded the effort to create retail stores at Apple (Nasdaq: AAPL), as the retailer's CEO. Johnson has moved aggressively to reduce discounting at Penney's and boost total profits.
The General Growth saga continues
Back during the credit crisis, Ackman initiated a huge position in mall owner and developer General Growth Properties just as it was falling apart due to excessive debt and deteriorating performance at its malls. The move was a home run, with Ackman coming out well ahead of his initial cost of $60 million to a stake worth over a billion dollars.
Like J.C. Penney, Ackman is now in control of much of General Growth's board of directors and has the helm in terms of determining the company's future direction. Between last year's third and fourth quarters, the stake rose in value by another 24% to $1.1 billion, or 14% of the portfolio.
Ackman has held tight with his position and received shares in real-estate developer Howard Hughes Corp. (NYSE: HHC), which was spun out of General Growth during its restructuring. The position is small at $157.6 million, or only 2% of the portfolio, but has some further upside. It owns quite a bit of real estate in areas including Las Vegas, near Baltimore and in a suburb of Houston.
Risks to Consider: Currently, Canadian Railway and J.C. Penney are in the early stages of experiencing operating improvements. This means there could be further room for these stocks to run. Of course, they have already moved up sharply, because investors are confident in Ackman's ability to make improvements. In this respect, the main risk is that much of the coming operational improvements are already priced into the stocks. I don't think that's the case, but it may be worth picking these stocks up on any significant pullback for a larger margin of safety.
Action to Take --> Because Ackman actively pursues large, publicly-traded companies, individual investors can easily ride off of his coattails. In fact, they can cherry pick his best ideas for even higher upside potential. The big upward movement in shares of General Growth Properties since the credit crisis serves to indicate just how much potential upside there is for investors who track Ackman closely.