In Depth on Bill Ackman's Investing Strategy (Legendary Hedge Fund Manager)
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Happy Saturday everyone! A few weeks ago I wrote an article about how to invest like Warren Buffet, which you can read below:
A lot of people really enjoy following the strategies of these highly successful portfolio managers and want to replicate that in their own investments.
Much of the content I write is for short term traders, and if that’s you, feel free to come back to my newsletter tomorrow for Weekend Wall Street, but this article is more of an all inclusive on how Bill Ackman invests.
About Bill (if you don’t know who he is)
William "Bill" Ackman is an activist investor who is the founder and CEO of Pershing Square Capital Management, a hedge fund management company based in New York City.
Ackman is known for his aggressive investment style and activist approach to investing, and has built a reputation as one of the most successful and controversial investors in the financial markets.
Ackman grew up in Chappaqua, New York, and attended the Wharton School of the University of Pennsylvania, where he graduated with a degree in finance in 1992. After college, he worked as an analyst at Gotham Partners, a New York-based hedge fund, before founding Pershing Square Capital Management in 2003.
Ackman's investment strategy is based on the principles of value investing, which involves buying undervalued stocks with the goal of holding them for the long term and realizing gains when the stocks reach their intrinsic value. Ackman is known for taking large positions in companies, sometimes buying up more than 10% of a company's outstanding shares, and then engaging with management to try to influence the company's strategic direction and increase its value.
How does he likely find undervalued stocks?
Fundamental analysis: This involves analyzing a company's financial statements, including its income statement, balance sheet, and cash flow statement, to identify undervalued stocks. Ackman may look for companies with strong financial metrics, such as high profits, low debt levels, and strong cash flows, that are trading at a discount to their intrinsic value.
Comparative analysis: This involves comparing a company's financial metrics and valuation to those of similar companies in the same industry, to see if it is trading at a discount relative to its peers. Ackman may use this method to identify companies that are undervalued compared to their competitors.
He looks for companies with strong financial metrics and good growth prospects that are trading at a discount to their intrinsic value, and then uses his extensive resources and expertise to try to unlock that value and generate returns for his investors.
Fundamental Analysis Basics
Earnings per share (EPS): This is a measure of a company's profitability, and is calculated by dividing the company's net income by the number of shares outstanding. A higher EPS indicates that the company is more profitable, and therefore may be undervalued if its stock price does not reflect this strong profitability.
Price-to-earnings ratio (P/E ratio): This is a measure of a company's valuation, and is calculated by dividing the stock's current market price by its EPS. A lower P/E ratio indicates that the stock is undervalued, as it is trading at a lower price relative to the company's earnings.
Price-to-book ratio (P/B ratio): This is a measure of a company's book value, and is calculated by dividing the stock's current market price by its book value per share. A lower P/B ratio indicates that the stock is undervalued, as it is trading at a lower price relative to the company's assets.
Debt-to-equity ratio (D/E ratio): This is a measure of a company's financial leverage, and is calculated by dividing the company's total debt by its total equity. A lower D/E ratio indicates that the company has less debt and is therefore less risky as an investment.
To read and interpret these statistics, you can start by looking at the company's EPS and P/E ratio to get an idea of its profitability and valuation. If the EPS is high and the P/E ratio is low, it may indicate that the stock is undervalued and could be a good opportunity. You can look at the D/E ratio to see how leveraged the company is and assess the potential risks of investing in the stock. Finally, you can look at the stock's beta to see how volatile it is relative to the market and decide if it is a good fit for your risk tolerance. Obviously, this data alone may be skewed and should never justify an investment decisions, BUT, if you want to start investing in companies, this is a great way to start.
Comparative Analysis
Comparative analysis is a method used by investors to evaluate a company's financial metrics and valuation relative to those of its competitors, in order to identify undervalued stocks. To do this, investors typically compare a company's financial statements and other data to those of similar companies in the same industry, and look for discrepancies or discrepancies that may indicate that a particular company is undervalued.
To do comparative analysis on stocks, you can follow these steps:
Identify a group of companies in the same industry: Start by identifying a group of companies that operate in the same industry and have similar business models and financial characteristics. This will allow you to compare apples to apples and get a more accurate picture of a company's valuation and financial health.
Collect financial data for each company: Next, collect financial data for each of the companies in your chosen industry, including data such as revenue, net income, total assets, total debt, and market capitalization. This data will be used to compare the companies and identify potential undervalued stocks.
Calculate key financial ratios for each company (as I just talked about above): Once you have collected the financial data for each company, you can use it to calculate key financial ratios such as the price-to-earnings ratio (P/E ratio), price-to-book ratio (P/B ratio), and debt-to-equity ratio (D/E ratio). These ratios will help you compare the companies and identify any potential discrepancies or anomalies.
Compare the companies and identify undervalued stocks: Finally, use the financial ratios you calculated to compare the companies and identify any potential undervalued stocks. Look for companies that have strong financial metrics and good growth prospects, but are trading at a discount to their peers. These may be good investment opportunities.
By comparing a company's financial metrics and valuation to those of its peers, you can identify potential discrepancies and anomalies that may indicate that a particular stock is undervalued and could be a good investment opportunity.
Ackman’s Three Trading Rules
He doesn’t have a huge portfolio - most of the time it’s no more than 15 stocks
As a hedge fund, he doesn’t take positions in stocks that are too small - mid cap and large caps only.
He coined the term “Return on Invested Brain Damage”, aka is the investment return worth the hassle of getting that return.
How to read cash flow
Simple, free cash flow generators appeal to his hedge fund.
Cash flow is typically reported on a company's cash flow statement, which is one of the main financial statements that companies use to report their financial performance.
The cash flow statement is divided into three main sections which I will explain below:
Operating Activities
Operating activities reflect the cash that is generated or used by the company's core business operations. This includes cash inflows from sales of goods or services, and cash outflows for expenses such as salaries, rent, and taxes.
Positive net flow from operating = company generating more cash than using
Investing Activities
Investing activities reflect the cash that is generated or used by the company's investment activities, such as buying or selling property, plant, and equipment. This includes cash inflows from the sale of investments, and cash outflows from the purchase of investments.
Positive net flow from investing = current investments making more than they are putting into new ones
Financing Activities
Financing activities reflect the cash that is generated or used by the company's financing activities, such as borrowing or repaying debt, issuing or buying back stock. This includes cash inflows from the issuance of debt or equity, and cash outflows from the repayment of debt or the repurchase of stock.
Positive net flow from financing = financing activities make more money than they are using to repay debt or buy back stock.
This week, Ackman’s hedge fund, Pershing Square Capital, bought over $150M of a stock.
HHC 0.00%↑ was bought up in huge quantities to the tune of $160M this past week.
Thanks for reading, hope this helped with something!
-Adit Dayal