Chipotle Mexican Grill

What it does: Chipotle Mexican Grill is a restaurant chain serving Mexican-inspired cuisine, including burritos, tacos, and salads.    

By Ben McPoland. I recently offloaded my shares of Chipotle Mexican Grill (NYSE: CMG). The restaurant stock has delivered some tasty outperformance for investors. As I write, it’s up 352% over five years.

The company’s focus on using fresh ingredients sourced from sustainable suppliers continues to be a huge hit with consumers. In Q1, it reported revenue and diluted earnings per share growth of 14.1% and 23.9%, respectively.

So why did I sell?

Two reasons, really. One is the valuation is sky-high, with the stock trading at 69 times earnings. That’s much higher than the US market average, which is high itself.

Second, I want to add to my position in Pershing Square Holdings, the FTSE 100 investment trust associated with hedge fund legend Bill Ackman.

The fund has a large holding in Chipotle stock, which allows me to stay invested (albeit indirectly). Also, Pershing shares are trading at a 26% discount to net asset value.

Basically then, I thought I’d take my gains from an overvalued stock to invest in one that looks to be significantly undervalued.

Ben McPoland owns shares of Pershing Square Holdings.

Kraft Heinz

What it does: Kraft Heinz is a packaged food manufacturer. Its largest shareholder is Warren Buffett’s Berkshire Hathaway.

By Stephen Wright. I’ve recently sold my investment in Kraft Heinz (NASDAQ:KHC). I don’t see anything wrong with the business, but I found an opportunity that looked better to me. 

The stock has a 4.4% dividend yield. Adjusting for withholding taxes, this amounts to a 3.74% return for UK investors (before foreign exchange fluctuations). 

The company has been improving its balance sheet over the last five years and is now in a much better financial position. But I think there are better stocks to own right now.

I’ve used the cash I had invested in Kraft Heinz to buy shares in Games Workshop. I think the company’s lower capital requirements give it better protection against inflation.

On top of that, I think the FTSE 250 firm might be a better source of passive income over time. That’s why I’ve made the change to my portfolio.

Stephen Wright owns shares in Games Workshop.

Vodafone

What it does: Supplier of mobile telecommunication services to individual and business customers in Europe and abroad.

By Mark David Hartley. I recently sold my Vodafone (LSE:VOD) shares after months of losses. The stock is down by almost 30% in the past 12 months and I don’t see a recovery on the horizon. Until recently, I considered the investment profitable due to the high 10% dividend yield but those dreams have been dashed. From next year, the dividend yield will be slashed in half, killing one of the stock’s key value propositions.

The cut is aimed at turning the company’s fortunes around and it may well work. If Vodafone starts funnelling that extra cash into its operations, the share price could recover. After all, net income increased significantly in 2023, so it’s doing something right. If I see evidence of a recovery, I might just reinvest – but I don’t expect much for at least a year. In the meantime, I’d rather invest that cash into a more profitable venture.

Mark Hartley does not own shares in Vodafone.

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Incredibly, Ackman has more than doubled the total return of the S&P 500 over the last five years. And the Pershing Square share price has rocketed almost 200% during this time.

This makes it the best-performing Footsie stock of the last half decade (just ahead of Ashtead and Frasers).

Many hedge fund managers run incredibly concentrated portfolios and Ackman is no different. As of December, he had 37% of his $10bn+ portfolio split between just two companies.

These were Alphabet (NASDAQ: GOOG)(NASDAQ:GOOGL), accounting for nearly 19% of his invested assets, and Chipotle Mexican Grill (NYSE: CMG), which made up just over 18%.

Here’s why Ackman owns this excellent pair of stocks.

Alphabet

Alphabet owns Google, which has a monopolistic 91% share of global internet search. It’s also the parent of YouTube, Google Cloud, and self-driving firm Waymo.

Last year, the tech behemoth made $73.8bn in net profit from $307bn in revenue. This makes it one of the most profitable businesses the world has ever seen.

However, that didn’t stop investors from dumping the stock early last year over fears that Google’s search dominance was under threat from ChatGPT and generative artificial intelligence (AI).

Ackman didn’t agree and started scooping up shares. That move has worked out well, with his position up more than 50% since. He said Google “will be a dominant player in AI for the very, very long term”.

While I agree with that statement due to the firm’s mind-boggling amounts of data, there are potential risks here. Google has released Gemini, its own AI chatbot, which has made some very public mishaps.

Moreover, it is far costlier and less profitable for Gemini to generate an answer than traditional search. That’s why Google is reportedly considering putting some of its core AI products behind a paywall.

Despite these risks, Wall Street still sees the firm growing its top line by 10% over the next few years. And the stock’s valuation looks reasonable at 23 times this year’s forecast earnings.

That’s cheaper than all the other ‘Magnificent Seven’ members: Apple (25.7), Amazon (43.1), Meta (25.5), Microsoft (36), Nvidia (34.8), and Tesla (55.1).

Therefore, Alphabet shares could be worthy of consideration for a portfolio (I invested in early 2023).

Chipotle

Similar to Alphabet, Ackman first invested in shares of Chipotle back in 2016 when they were going through a rough patch. This followed food poisoning outbreaks at some of its restaurants in 2015.

The stock has been a monster winner since then, proving that Ackman has a real knack for spying lucrative opportunities.

Chipotle’s organically grown produce and rejection of preservatives or artificial flavours (and freezers and microwaves) has resonated with customers, separating it from the competition. As a result, earnings growth has been strong for years.

Unfortunately, that growth comes with a hefty price tag today. At $2,965, the stock is trading at 66 times earnings. I wouldn’t invest at that price.

However, I’m happy to hold Pershing Square shares, and expect Ackman to sniff out more such bargains in future.

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But with his closed-ended fund’s London-listed shares now trading at a 15% discount to their net asset value (NAV) is now the time to buy into Ackman’s well-earned reputation on the cheap?

Well, it remains to be seen whether this steep discount can be closed in the coming quarters. Ackman initiated the London listing for the £3.6bn fund with the explicit purpose of closing the valuation gap by increasing index fund holdings due to its automatic inclusion in the FTSE 250. As the fund was only listed in May, and joined the FTSE 250 in June, only time will tell whether this discount can be narrowed and today’s valuation prove a true bargain pickup.

But, there is no doubting that UK investors will now find it easier to piggyback on the future returns of a very successful investor with a long history of market-beating returns. However, they do need to remember well the fact that historic out-performance does not indicate a likelihood of future out-performance.   

An added wrinkle to consider is that of the 10 long positions and one short position the fund publicly disclosed holding as of June are all North America-listed companies and so may be a bit risky for British investors. Furthermore, Ackman is famous for making highly concentrated bets. As of the end of Q1, a little more than 70% of the portfolio was tied up in just three companies: Burger King parent Restaurant Brands International; fast casual restaurant Chipotle; and snack food producer Mondelez. This means investors should expect wild swings in performance and share price due to little diversification.

A safer option?

Another famous American hedge fund manager who has tapped British investors for long-term capital is Dan Loeb of Third Point. His London-listed, closed-ended fund, Third Point Offshore Investors (LSE: TPOG), invests its capital in the Third Point master fund and also trades at around a 15% discount to its NAV. Like Ackman’s fund, this discount is down to a variety of factors such as illiquidity of shares, the relatively high management fees charged, and investors pricing in the potential for poor performance.

As the current discount is relatively in line with historic levels, I reckon the fund probably isn’t a screaming bargain. However, for investors looking for exposure to a more diversified hedge fund, Third Point could fit the bill with the top three positions as of Q1 representing just under 40% of the portfolio. The fund is also more international in nature with large stakes in Italian bank UniCredit SpA, German utility E.On and Swiss multinational Nestlé as of the end of June.

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