Pershing Square Holdings (LSE: PSH) is the listed FTSE 100 vehicle for billionaire investor Bill Ackman’s hedge fund.
In the third quarter, Ackman upped his stake in Google parent Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL).
Why did he do this? And is this now a Footsie stock I should buy more of? Let’s take a look.
A rare FTSE 100 stock
As a quick reminder, a hedge fund is a pooled investment fund traditionally associated with wealthy investors. Fund managers generally have free rein to invest in any asset or strategy they think will bring about a return.
They can use derivatives to hedge or leverage positions, and they can sell short and use debt. Therefore, the gains but also the losses can be outsized, which is a risk, and there’s an increased chance of volatility with such strategies.
Pershing Square’s portfolio typically consists of 8-12 large North American stocks. On top of this, there’s often a hedging strategy in place to mitigate market-related risk or take advantage of profit opportunities.
Now, it is rare that small individual investors (like myself) get to invest their money alongside renowned hedge fund managers like Bill Ackman. But this FTSE 100 stock offers just that opportunity.
Loading up on Alphabet shares
Regulatory filings show that the fund nearly doubled its stake in Alphabet Class A shares during the third quarter. The value of that stake equaled $570m.
It already owned 9.38m shares of Alphabet’s Class C stock, which carries no shareholder voting rights. That stake was worth $1.2bn at the end of the quarter.
Why is Ackman and his team so bullish on Alphabet?
A fruitful pick
Well, Alphabet ticks all the boxes that Ackman looks for in a company. In particular, it is a large, capital-light business that generates strong revenue growth.
This was on display in the firm’s Q3. Advertising revenue at both Search and YouTube grew 11% year on year, accelerating from low to mid-single digit growth in Q1 and Q2. YouTube is the overall number one streaming destination on connected TVs.
Meanwhile, Google Cloud grew 22% and booked its second consecutive quarter of profitability. Ackman thinks margins should expand meaningfully in this division as it catches up to more profitable peers like Amazon‘s AWS.
Also, Alphabet has nearly $110bn on the balance sheet. This can be put to work buying back shares to increase profitability metrics like earnings per share (EPS).
Looking forward, generative artificial intelligence (AI) chatbots like ChatGPT remain a potential threat to its search business. But for now, Google remains as dominant as ever.
Alphabet shares are up nearly 50% since the fund first invested in them in the first quarter. This highlights the strength of Ackman’s stock picking.
Will I buy invest more money?
Pershing Square shares are currently changing hands for £31. This means they’re trading on a sizeable 35% discount to the net asset value (NAV) of the fund.
Amazingly, this attractive discount persists even though the share price has nearly trebled in five years.
Beyond Alphabet, it also has large holdings in Universal Music Group, the world’s leading music company, and Hilton Worldwide.
I’m keen to buy more of this FTSE 100 stock as I think it continues to be significantly undervalued.