Billionaire Bill Ackman invests 37% of his portfolio in two great stocks

Billionaire Bill Ackman runs the hedge fund Pershing Square Capital Management. He easily surpassed this with his 212% total return over his five years ending February 2024. S&P500, an increase of 99% over the same period. That makes him a good case study for aspiring investors.

With that in mind, Ackman had split 37% of his $10.4 billion portfolio between the two companies as of the December quarter. alphabet (Google 0.40%) (GOOG 0.36%) Accounting for 19% of his investment assets, Chipotle Mexican Grill (CMG 1.79%) It accounted for 18%. Its position sizing evokes high confidence.

Here’s what investors need to know about these two spectacularly successful companies.

1. Alphabet

Alphabet reported strong results in the fourth quarter, beating expectations for revenue and bottom line. Total revenue rose 13% to $86.3 billion, with particularly strong sales growth in the cloud computing division. Meanwhile, GAAP net income increased 52% to his $20.7 billion as cost control efforts expanded operating margins by 300 basis points. Investors can expect similar revenue growth in the coming quarters, but earnings growth will definitely slow.

Google, a subsidiary of Alphabet, has the enduring competitive advantage of being able to source data from across the Internet. Specifically, the company has 15 products serving at least 500 million users and 6 products serving more than 2 billion users. This includes the internet search engine Google Search, the streaming platform YouTube, the Android mobile operating system, and the Chrome web browser.

As a result, Google dominates the digital advertising market because of its deep understanding of the consumer behaviors that media buyers value. The company accounted for 39% of digital ad spending last year, according to Statista. Google is working to strengthen its position by injecting new artificial intelligence (AI) capabilities into the ad tech ecosystem, including recently adding generative AI capabilities to Google Search.

Meanwhile, Alphabet has been steadily gaining market share in cloud computing by investing in product development and go-to-market capabilities. Google Cloud Platform accounted for 11% of cloud infrastructure and platform services revenue in the fourth quarter, an increase of 1 percentage point year over year. Google still follows Amazon and microsoft However, the recently released Gemini could help the company gain even more market share.

According to the company, Gemini is a machine learning model that can outperform GPT-4 (the engine behind ChatGPT Plus) across a variety of benchmarks. Gemini allows Google Cloud customers to build his AI applications such as conversational chatbots and intelligence search agents. Gemini also integrates with the Google Workspace application to automate tasks such as drafting content in Google Docs, synthesizing data in Google Sheets, and generating images in Google Slides.

Going forward, Wall Street expects Alphabet to increase its revenue by 10% annually over the next five years, but that forecast could be beat if the company only maintains market share in advertising and cloud computing. remains. I say that because digital ad spending is expected to grow at 15% per year through his 2030, and cloud computing revenue is also expected to grow at 14% per year over the same period.

But even if the Wall Street consensus is correct, its current valuation of 6.4 times sales seems reasonable. Patient investors should feel comfortable buying this growth stock today, but I think I’m much more conservative than Bill Ackman when it comes to position sizing.

2. Chipotle Mexican Grill

Despite a tough environment for many of its peers in the restaurant industry, Chipotle looked strong in the fourth quarter. The fast-casual restaurant chain’s revenue increased 15% to $2.5 billion, operating margin expanded 80 basis points to 14.4%, and non-GAAP net income increased 25% to $10.36 per diluted share. Driving that success was his strong 8.4% same-store sales growth, driven by pricing power and his 7.4% increase in foot traffic.

These numbers are really impressive when you consider the context. Same-store sales for the average restaurant rose just 1.1% in December, but customer traffic actually fell 1.7%, according to the National Restaurant Association. This means Chipotle brought in more people while the average competitor lost business, and the company does this regularly. This is a testament to the brand authority that Chipotle has cultivated through its “Honesty Foods” strategy.

To elaborate, Chipotle only sources responsibly raised meat (no hormones or antibiotics) and organically grown produce, and uses only real ingredients (no preservatives or antibiotics). (No artificial flavors used). CEO Brian Nicol said the company also focuses on fresh ingredients, meaning it doesn’t use freezers, can openers or microwaves. This strategy helped Chipotle become independent from other quick service restaurants.

Unfortunately, not all good companies are good investments. Wall Street expects Chipotle to increase its earnings per share by 20% annually over the next five years. Based on this consensus estimate, the current valuation of 65x P/E looks quite expensive. To be fair, investors who want shares in this company should be prepared to pay a premium, but I personally would wait for a cheaper entry point before buying the stock.