Pershing Square Starts Hilton Stake Again

Bill Ackman's investment firm Pershing Square Capital Management today revealed that they've started a new position in Hilton (HLT).  Pershing now owns a 3.7% stake, or around 10.9 million HLT shares.

This isn't the first time Pershing has owned HLT shares in recent memory.  They sold their previous stake in Q2 of 2017 after the company split itself up into a real estate company, an asset light management company, and a timeshare business.

This time around, they've bought HLT, which is just the asset light hotel management business.  This year, HLT shares have dropped from a high of $87.62 to a low of $63.76 before slightly rebounding to current levels of around $67.

For more on this fund, we've also highlighted their Pershing Square's new position in Starbucks (SBUX) and thesis presentation.

Pershing Square Q2 Letter: Sold Undisclosed Hilton Stake

Bill Ackman's Pershing Square has put out its mid-year report which includes commentary on their investments.  They also disclose that they previously owned a stake in Hilton (HLT) but recently sold it after the spin-offs took place.

In the letter, they also write about their latest investment, Automatic Data Processing (ADP):

"ADP is a classic Pershing Square investment. It is a simple, predictable, free-cash-flow generative business that has under performed its potential. As a conservatively financed, capital-light business with long-term customer relationships in a sector with substantial positive growth, we believe it has modest downside. If it is able to achieve its potential, we believe it offers substantial upside. We acquired ADP for the funds along with a co-investment vehicle (PSVI) which we recently raised to increase our ownership of the company.  We believe that ADP is one of the highest quality businesses we have owned, and one which offers an enormous opportunity for operational improvement.

They also provide an update on their stake in Chipotle (CMG), noting that the company has battled another setback with a norovirus incident in Virginia.  That said, Pershing feels that the company is still on the right track.  They write,

"We made our investment in Chipotle anticipating that the sales recovery would be neither smooth nor predictable,but with a belief that the key drivers of Chipotle’s powerful economic moat and long-term success would remain intact. With the steps that the company has taken to improve its business, we continue to believe there is an enormous long-term growth opportunity for Chipotle given: (1) the significant potential to drive sales per restaurant higher through mobile and digital ordering, menu innovation, catering, and improved operations, (2) the opportunity to expand its vastly under penetrated restaurant base in the U.S., and (3) the considerable potential to build the brand internationally."

Their letter also touches on Mondelez (MDLZ), Howard Hughes (HHC), Air Products (APD), Restaurant Brands (QSR), Platform Specialty Products (PAH), Nomad Foods (NOMD), and Fannie Mae/Freddie Mac, as well its short position: Herbalife (HLF).


Embedded below is Pershing Square's Q2 letter:



You can download a .pdf copy here.

What We're Reading ~ 4/19/17

The Attention Merchants: The Epic Scramble To Get Inside Our Heads [Tim Wu]

Why we think we're better investors than we are [NYTimes]

Inside the hotel industry's plan to combat Airbnb [NYTimes]

Two law professors mimic activist hedge fund: a corporate raiding adventure [The Atlantic]

Vanguard is growing faster than everybody else combined [NYTimes]

Q&A with Blackrock's (BLK) Larry Fink [Bloomberg]

Why Facebook (FB) keeps beating every rival: it's the network of course [NYTimes]

A look at the first decade of augmented reality [Ben Evans]

Barry Ritholtz's rules of valuations [The Big Picture]

The making of a brand [Collaborative Fund]

Is American retail at a historic tipping point? [NYTimes]

E-commerce is a bear [Andy Dunn]

American Express, challenged by Chase, is losing the 'snob' war [NYTimes]

The potential of graphene to revolutionize the airline industry [Richard Branson]

A day in the life of a food vendor [NYTimes]

Market Strategist Jeff Saut on Being Wrong and Still Making Money

Raymond James market strategist Jeff Saut is out with his latest commentary entitled, "Being Wrong and Still Making Money."  It's been a while since we checked in with Saut, so here's what he's saying these days.

He has been cautious over the past month or so and admits his stance has been 'too cautious.'  Saut then dove into the concept of being wrong and still making money.  He quotes Peter Bernstein, who wrote:

"The trick is to survive!  Performing that trick requires a strong stomach for being wrong because we are all going to be wrong more often then we expect. The future is not ours to know. But it helps to know that being wrong is inevitable and normal, not some terrible tragedy, not some awful failing in reasoning, not even bad luck in most instances. Being wrong comes with the franchise of an activity whose outcome depends on an unknown future (maybe the real trick is persuading clients of that inexorable truth)."

Saut then goes on to reference a piece that divides investors into three categories: Rabbits, Hunters, and Assassins, based on how they act in the market.  Written by Lee Freeman-Shor, it states:

"My findings suggest the odds are that an investor's great ideas will lose money. As such, before you invest a cent into an investment idea, it is imperative to have a plan of action as to what you will do if you find yourself in a losing position. When losing, the successful investors I worked with planned to become either Assassins or Hunters. Assassins sold losing investments that fell by a certain percentage or that declined by any amount and showed no signs of recovery after a certain period of time. Hunters invested a lesser amount at the outset and with a plan of buying significantly more shares if the price fell. Hunters were also unafraid to sell if it became clear that they had made a mistake. The bad investors didn't have a plan and consequently turned into Rabbits. When losing money, Rabbits neither bought more shares nor sold their holdings. Once forming an initial perception, Rabbits were achingly slow to change their opinion of a stock. Which tribe will you become a member of?"

As to where Saut is looking to put any money to work on pullbacks, he recommended Hilton (HLT), Flexion Therapeutics (FLXN), Nvidia (NVDA), Iridium (IRDM), and Texas Capital Bancshares (TCBI). 

Embedded below is Jeff Saut's latest market commentary: Being Wrong and Still Making Money



You can download a .pdf copy here.

What We're Reading ~ 11/30/16

Warren Buffett's meeting with University of Maryland students [UMD]

Is the next financial crisis on its way? [Steve Eisman]

A write-up on the impending Hilton (HLT) spinoff [Clark Street Value]

CBRE (CBG): industry deep dive to detect an emerging moat [Punch Card]

A look at Discovery Communications (DISCA/K) [Contrarian Edge]

Sustainable sources of competitive advantage [Collaborative Fund]

Why deep learning matters and what's next for AI [Algorithmia]

The unexpected genius of Facebook's Mark Zuckerberg [Fortune]

Google's online travel adventure upsets its biggest advertisers [Bloomberg]

A billionaire's dreams of creating a guns empire [NYMag]

If oil refiners crash, so will the economy [WSJ]

Mastercard, Visa set to reap spoils of India's war on cash [Bloomberg]

How Best Buy (BBY) fought Amazon [WSJ]

The evolution of media & entertainment: conversation with CEOs [YouTube]

How to get comfortable with being umcomfortable [Inc]

Why gut feelings may really help you make risky decisions [Washington Post]

Why stoicism is one of the best mind-hacks ever devised [Aeon]

Rich Pzena Likes Banks, Hilton, Seagate

Rich Pzena of Pzena Investment Management appeared on CNBC yesterday and said the market has divided into 2 groups: those that are in sync with the 'lower for longer' philosophy and those aren't cheap stocks, and those that are out of sync like financials/energy/materials that are selling for attractive valuations.

"Any stable, low volatility cash flowing stock" is basically overpriced he feels.

He argued financials were intriguing: "If interest rates go up, you make a fortune, but if they don't you make 10% a year." These companies are paying out their earnings.  He owns Citigroup (C) and Bank of America (BAC), among others.

On the market in general, he says that, "The steady decline in the 10-year is what's caused this whole market situation. And now, maybe it's bottoming."

He thinks interest rates will rise this year and then will go gradually higher.  He thinks his stocks are positioned well to weather downturns in the market or rising rates.

"As this interest rate bubble ends, I think we'll see a re-emergence of active management.  There's lot of interesting opportunities that's not in touch with where the money has flowed."

Pzena also preached what he thinks is instrumental to success:  "Volatility is the opportunity for every real investor.  What we do for a living is exploit other people's fear of volatility to be able to buy stocks at a low price.  Volatility has nothing to do with risk.  Volatility is just stuff going up and down.  And risk is losing money."


Pzena's New Pick: Hilton (HLT)

Pzena has also bought Hilton (HLT) and says that apartment REITs sell for twice as much as lodging REITs.  Hilton is splitting into 3 companies by year-end: a fee based management co, a lodging REIT, and a timeshare business.

"The company's depressed because it's in lodging and people are fearful that we're near the end of the upcycle in lodging."

He feels that it's not a spectacular value like the banks are, but for what it is (a leading franchise) it looks good. He notes HLT has 20% share of all hotel rooms under construction.

He thinks the spin-off in the near-term leads to 20% upside.  Post-spin, he hopes the management company would get a higher multiple than the REIT.  But he thinks that may take time to play out as the cashflow evolves.


On Seagate (STX)

This is one of Pzena's larger positions.  Seagate is in the middle of correcting the overcapacity it had.   They've had strong volumes on the enterprise side and he says that's the whole story:  "It's a replacement of storage in the cloud rather than in the device."


For more from prominent investors, head to David Tepper's recent interview, as well as Keith Meister's thesis on YUM and Barry Rosenstein's thoughts on the market.