"Tracking Bill Ackman’s Pershing Square Portfolio – Q2 2020 Update"
"Bill Ackman’s 13F portfolio value increased from $6.57B to $7.75B this quarter.Pershing Square increased Restaurant Brands while dropping Berkshire Hathaway during the quarter.The largest three 13F positions are Lowes Companies, Restaurant Brands, and Chipotle Mexican Grill. They together account for ~56% of the portfolio.This article is part of a series that provides an ongoing analysis of the changes made to Pershing Square’s 13F portfolio on a quarterly basis. It is based on Ackman’s regulatory  filed on 8/14/2020. Please visit our  article for an idea on how his holdings have progressed over the years and our  for the fund’s moves during Q1 2020.Ackman’s 13F portfolio value increased ~18% from $6.57B to $7.75B this quarter. The number of positions decreased from 10 to 7. The portfolio remains heavily concentrated with a few huge bets. The top three positions account for ~56% of the total portfolio value: Lowes Companies, Restaurant Brands, and Chipotle Mexican Grill.In addition to partner stakes, the fund also invests the capital from Pershing Square Holdings (PSHZF), a public entity that debut in Euronext Amsterdam in October 2014. This was set up primarily to increase the amount of capital invested that is permanent. Pershing Square Holdings had underperformed the S&P 500 since its EOY 2012 inception. This changed last year as they had an outstanding 58.1% return compared to 31.5% for the S&P 500 index. That was followed with a ~44% return YTD thru 8/25/2020 compared to 7.9% for the S&P 500 index. Their original flagship fund’s (2004 inception) track record is excellent with annualized returns at 16.2% compared to 9.2% for the S&P 500 index.Note 1: As a closed end fund, Pershing Square Holdings (PSHZF) has always traded at a discount to NAV. That discount has widened over the last few months to ~33% as of 8/25/2020 with the stock price at ~$26.50. Their semiannual letter had a note regarding this discount: while many internal measures including buybacks were taken, another factor in the horizon that could narrow the discount is the possible inclusion in FTSE 100 index.Note 2: in July, Pershing Square sponsored the largest SPAC IPO to date, Pershing Square Tontine Holdings (PSTH.U). The offering had several retail-investor friendly attributes: a) no founder share dilution compared to ~20% dilution with most SPACs, b) warrant structure designed to minimize speculation – one-ninth redeemable warrant along with two-ninth exercisable only if units are not redeemed in connection with business combination, and c) sponsor warrants are priced “correctly” as compared to almost free with most SPACs.Note 3: It was disclosed in late March that liquidating market hedges had netted them ~$2.6B. This was compared to ~$27M in premiums paid. Details follow: they built a $70B notional position in credit default swaps between Feb 24 and March 2 and unwound the whole position in two weeks that that ended on March 23rd.To learn more about Bill Ackman, check-out the book “”.New Stakes:None.Stake Disposals:Berkshire Hathaway Inc. (BRK.A) (BRK.B): BRK.B is a ~15% of the portfolio position purchased in Q2 2019 at prices between $197 and $219 and the stock currently trades at ~$219. Next quarter saw a ~14% stake increase at prices between $196 and $215. That was followed with another one-third increase last quarter at prices between ~$162 and ~$230.  The entire stake was eliminated at a loss last month. They sold to free up cash to have liquidity in case of another market crash.Blackstone Group (BX) and Park Hotels (PK): These were two small positions established last quarter. It was disclosed in May that both positions were sold as they could not build substantive stakes before the prices went back up.Stake Increases:Lowes Companies (LOW): LOW is currently the largest position at ~22% of the portfolio. It was established in Q2 2018 at prices between $81 and $101 and increased by ~9% next quarter at prices between $95 and $117. Q4 2018 also saw a ~13% increase at prices between $86 and $114 while Q2 & Q3 2019 saw a ~10% combined trimming. There was a ~40% stake increase last quarter at ~$84 per share. The stock currently trades at ~$168. This quarter also saw a ~4% increase.Note: Pershing Square's cost-basis on LOW is ~$85 per share. Their buy thesis was on the premise that Lowes is laying the groundwork for a multi-year transformation.Restaurant Brands International (QSR): The QSR stake is currently at ~18% of the portfolio. Pershing Square’s original cost-basis was ~$16. Q3 2017 saw a ~32% selling at prices between $59 and $66. That was followed with a ~22% reduction in H1 2018 at prices between $53 and $64. The four quarters thru Q3 2019 had also seen a ~28% selling at prices between $52 and $79. In June, they increased the position by roughly two-thirds thru forward contracts: $397.50M aggregate purchase price for a $44.20 per share cost-basis. The stock currently trades at $54.92.Stake Decreases:Howard Hughes Corp (HHC): HHC is a 7.32% of the 13F portfolio position established in 2010 as a result of its spin-off from GGP Inc. Recent activity follows: Q3 2018 saw a ~3% trimming and that was followed with a ~40% reduction next quarter at prices between $90 and $124. There was a ~85% stake increase in Q4 2019 at a cost-basis of ~$115 per share because of conversion of total-return-swaps they owned. Last quarter saw the addition of ~10M shares at ~$50 per share thru a private placement. The stock is currently at $59.86. There was a ~11% trimming this quarter.Note: In May, their beneficial ownership went up from ~20% to ~33% of the business due to the sale of put options with strikes between $75 and $92 and expiry between January & August 2021. For investors attempting to follow, HHC is a good option to consider for further research.Kept Steady:Chipotle Mexican Grill (CMG): CMG is a large top-three position at ~16% of the portfolio. The stake was established in Q3 2016 at a cost-basis of ~$405 per share. The position was sold down by ~30% in Q3 2018 in the high-400s price-range and that was followed with a ~17% trimming over the next four quarters. The stock currently trades at ~$1372. Last quarter saw a one-third selling at ~$860 per share.Agilent Technologies (A): Agilent was a small ~4% of the portfolio stake established in Q3 2019 at prices between $66 and $78. Next quarter saw a large stake built at prices between $63 and $90. The stock currently trades at ~$101 and the stake is at 14.39% of the portfolio.Note: The analytical measurements business has an attractive razor-razorblade business model. The buy thesis is based on margin expansion and leverage opportunity.Hilton Worldwide Holdings (HLT): The large ~13% portfolio stake was established in October 2018. It was purchased at prices between $64 and $78 and the stock currently trades at $91.71. Last quarter saw a ~30% stake increase at a cost-basis of ~$70.Note 1: Their overall cost-basis is ~$72 per share.Note 2: In Q4 2018, Hilton Worldwide Holdings came back in to the portfolio after a gap of eighteen months. The previous position was purchased in Q3 2016 and disposed a year later. Pershing Square has said that the new position was acquired at a better valuation compared to their previous purchase. Also, the business structure has transformed into a capital-light model because of the spinoff in early 2017 of Park Hotels & Resorts (PK) and Hilton Grand Vacations (HGV).Starbucks Corp. (SBUX): The 9.62% of the 13F portfolio SBUX stake was established in October 2018 at a cost-basis of ~$51 per share compared to the current price of $86.05. Q4 2019 saw a ~40% selling at ~$86 while last quarter there was a ~85% stake increase at a cost-basis of ~$60 per share.Fannie Mae (FNMA) and Freddie Mac (FMCC) are other long positions in the partnership - the holdings were disclosed in 13D filings on November 15, 2013 - as they are not , they are not listed in the 13F report. Ackman held just under 10% of the outstanding shares of both these businesses - 115.57M shares of FNMA at a cost-basis of $2.29 and 63.5M shares of FMCC at a cost-basis of $2.14. The combined investment outlay was ~$400M. FNMA & FMCC currently trade at ~$2.20 per share. In March 2018, Pershing Square said their Fannie/Freddie pfds now amounts to 21% of the total investment in the two GSEs. They said it is a hedge in case the resolution favors pfds more than the common. Pershing Square’s semi-annual report last week had the following regarding Fannie/Freddie: although the share price has not budged, they believe Fannie/Freddie are firmly on a path to exit conservatorship and expects the capital rule to finalize by EOY.The spreadsheet below highlights changes to Pershing Square’s 13F stock holdings in Q2 2020:6/5/2020 – 13D – HHC beneficial ownership from 19.9% to 32.5% due to selling of put options (6.925M shares) - Exhibit 99.9 has the details – strikes are between $75 and $92 and expiry between January & August 2021. Details from 13D: “The Reporting Persons beneficially own 10,918,008 shares of Common Stock (the “Subject Shares”). On June 3, 2020, the Reporting Persons sold 6,925,000 in-the-money over-the-counter European-style put options referencing 6,925,000 shares of Common Stock (the “Put Options”). Pursuant to the Put Options, in the event the stock price of the Issuer is less than or equal to the Put Option strike prices at the time of their expiration (each expiration and strike price, as set forth in Exhibit 99.9), the Reporting Persons would be obligated to purchase 6,925,000 shares of Common Stock. In the case where all of the Put Options are exercised by the counterparties, the Reporting Persons would beneficially own 32.5% of the outstanding shares of the Common Stock of the Issuer. The Subject Shares represent approximately 19.9% of the outstanding shares of Common Stock and the Put Options sold represent 12.6% of the outstanding shares of Common Stock, based on 54,929,674 shares of Common Stock outstanding as of May 7, 2020 as reported in the Issuer’s Form 10-Q filed on May 11, 2020 for the quarterly period ending March 31, 2020.” “The Reporting Persons, on behalf of PSH: (i) cash-settled certain forward purchase contracts referencing 3,719,755 shares of Common Stock paying an aggregate amount of $212,342,766; (ii) wrote Put Options referencing 6,925,000 shares of Common Stock receiving premium of $168,958,095, and (iii) sold 1,749,072 shares of Common Stock receiving proceeds of $102,598,296 (for a net receipt of $59,213,625). In addition, the Reporting Persons, on behalf of PS International, acquired 469,691 shares of Common Stock through the physical settlement of certain forward purchase contracts paying an aggregate amount of $54,014,465. The source of funding for the physical settlement was derived from the capital of PS International.”Regulatory filings thru 6/4/2020: 13D, Form 4 – 3/31 – HHC – 16.4M shares (29.8% of business) including ~4.2M shares in forward contracts – 10M shares added in a private placement at ~$50 per share - “The source of funding for the transactions pursuant to which the Reporting Persons obtained beneficial ownership of the Subject Shares was derived from the respective capital of the Pershing Square Funds. The Pershing Square Funds purchased 10,000,000 shares of Common Stock for aggregate consideration of $500,000,000 in a private placement with the Issuer.”, 13D – QSR – 6/2 – 29M shares – 9.6% of business – 25.1M in common stock and the rest issuable – on June 1, purchased 9M shares w.r.t. forward contracts for 397.5M aggregate purchase price - $44.2 per share cost-basis, 13D/A, Form 4 – 2/26 – CMG – 1.16M shares – 4.2% of business – 350K shares sold ~$880,5/27/2020 - Earnings Call  – built a $70B notional position in credit default swaps between Feb 24 and March 2 and unwound the whole positions in two weeks starting March 12th netting well over $2B (at the peak on March 12, the paper gain was $2.7B). Following that, they added equity exposure: A – 16% increase @ 64.57, HLT – more than one-third increase at $70.07, HHC – 157% increase, LOW – 52% increase @ 4.3M shares @ 84, QSR – 55% increase @ 41.65, SBUX – bought at 51, sold at 86.30, and repurchased at 60. EXITS – BX, PK, and BRK.B – the former two as they were very small positions and the price had gone up and so did not have a chance to build. BRK.B because they wanted more cash available for opportunities. Still has the Fannie/Freddie stake in the common stock and expects a good outcome. CMG – frustrated as they couldn’t buy in the mid-400s because of board representation and associated restrictions."