Pershing Square Holdings
This investment company has been doing its prospects of easing into the FTSE 100 blue chip index no harm whatsoever (Miles Costello writes).
In its latest glowing update published yesterday, the FTSE 250 company overseen by the hedge fund billionaire Bill Ackman, 54, boasted a return on its portfolio for the year to Tuesday of 48.2 per cent. That knocks into a cocked hat the 5.8 per cent return over the same period by its benchmark the S&P 500.
This sort of performance has made it more valuable than the wealth manager St James’s Place and the housebuilder Barratt Developments, both members of the FTSE 100 while it remains a midcap.
The only thing holding the fund back seems to be the inexplicable discount of getting on for 32 per cent at which the shares trade relative to their net asset value.
Pershing was set up in 2012 by Pershing Square Capital Management, Mr Ackman’s hedge fund, and listed in London two years later. Its aim is to generate capital appreciation for shareholders, as opposed to being an income play, and it holds mainly long but occasionally short positions in equities as well as owning debt securities and derivatives.
The small portfolio is concentrated in North America and bets include positions in Berkshire Hathaway, the conglomerate set up by Warren Buffett, and the Hilton Worldwide hotels group.
Just over a third of the portfolio consists of credit default swaps, a kind of insurance against companies reneging on their debt obligations, which are used as hedges.
Part of Pershing’s success can be attributed to Mr Ackman’s return to a more active investment role close to three years ago after a sustained period of poor performance.
His characteristic stockpicking style and willingness to engage directly with company management have improved returns. Mr Ackman also began paying modest quarterly dividends, which give Pershing a yield of just under 1.5 per cent.
In spite of his exposure to some unfashionable sectors, including casual dining through Chipotle Mexican Grill, Mr Ackman has fared very well. His holding in Chipotle, for example, has risen strongly this year after the restaurant company increased sales online under a transformation drive by a new chief executive. Similarly, a position in the home improvement retailer Lowe’s Companies performed well thanks to American consumers fixing up their properties during the lockdown.
The holdings in Hilton and Berkshire Hathaway, the latter of which has recently been exited, have lost out during the recent turmoil, but arguably could have been considerably worse. Mr Buffett’s enviable track record has taken a knock recently but his long-term performance remains very strong.
Pershing’s share price remains confusing. The stock has gained by just over 38 per cent in the past 12 months, way ahead of the FTSE 250, which has lost just under 6 per cent.
Despite this, that yawning discount has stubbornly refused to narrow. The discount makes the shares look cheap, but of course if it persists it means any owner will feel they are losing out when they sell.
Pershing Square’s board remains of the view that strong investment performance, bolstered by activities such as share buybacks, will eventually narrow the gap. It’s also true that the additional demand for the shares that would come with a FTSE 100 quote could help the process along. We’ll see.
The shares, off 10p or 0.5 per cent at £20.90 yesterday, have done well since this column recommended buying them in January. Investors who went in then should stay there.
Advice Hold
Why Very strong recent investment performance but the wide discount remains a niggle
Electrocomponents
There is not a lot to dislike in a company whose quarterly trading is showing solid sequential improvement, especially one such as Electrocomponents that specialises in distributing more than 500,000 products, electrical and electronic parts and spares, in 80 countries and is regarded as a pretty accurate barometer of world industrial trade (Robert Lea writes).
Yet you do not need to look far into the figures to reveal that even the very latest trading shows that business is markedly down on last year, albeit not by far.
The figures across the £1.9 billion annual turnover group, which trades on margins of 11 per cent, show that in the western world’s lockdown quarter of April to June sales were down 11 per cent. That improved significantly in the July to September quarter but business was still off by 4 per cent.
Given the global economic dislocation of the pandemic — and even that is overlaying the disruption of China-US trade spats — the chief executive is correct to assert that the figures show the “strength and resilience” of a group that supplies many critical components to important industries. What is not quite so certain is what the next few months will bring. This is where the strength of the investment case and the performance of the shares are a matter of conjecture.
Lindsley Ruth, the chief executive, helps to make the short-term bearish case, conceding that the business was caught carrying too much inventory and that freight costs and labour inefficiencies in a time of workplace protocols are eating into margins.
The more bullish case is that the group has a strong market position, which will only strengthen as the opposition dissipates and that, whatever a new world looks like, its investment in multiple delivery channels is money well spent. Electrocomponents’ supporters know that, which is why the stock has not only surpassed where it was before the pandemic but at 735p, valuing the company at £3.3 billion, it is pushing towards an all-time high.
However, investors should take heed of the decision to keep the dividend suspended because of the depth of the current uncertainty.
Advice Hold
Why There is a case for top-slicing some profit and/or waiting for a lower entry
