21% of Billionaire Ackman’s Portfolio Is in 1 Stock

Bill Ackman of Pershing Square Capital is one of the most-watched young fund managers in the stock market today. Famous for his activist investing style, Ackman is also well-known for maintaining a highly concentrated stock portfolio.

Today, more than 20 percent of his portfolio is in a single stock: Chipotle Mexican Grill (NYSE:CMG). Ackman’s fund currently owns 1.11 million shares of the stock, translating to a market value of over $1.8 billion.

Chipotle’s Ongoing Growth + Superior Service Model

To understand the investment thesis behind Chipotle, it’s important to note that management plans to expand from its current base of 3,187 locations to an eventual target of 7,000.

In 2022, for instance, the company opened 236 new locations. In 2023, management hopes to add 255-285 more locations. By massively expanding its footprint, Chipotle could see rapid revenue growth and greater market penetration.

Alongside this aggressive expansion plan, Chipotle’s earnings are also expected to grow at a rapid rate over the next few years. Analysts project earnings growth of nearly 22 percent over the next 12 months, while compounded earnings growth over the next 3-5 years is projected at 21 percent.

In 2022, Chipotle saw its revenues increase 14.4 percent, while same-store sales increased 8 percent. Despite considerable challenges associated with inflation, Chipotle successfully raised its operating margins from 10.7 percent to 13.4 percent. Total return on equity for the year stood at a respectable 41.0 percent.

Although the idea had not yet been developed when Ackman bought his position, Chipotle could also benefit from a new-and-improved service model over the coming years. This model, known as the Chipotlane, allows customers to order their food via the company’s mobile app ahead of time and pick it up at a dedicated drive-thru lane. Chipotle is investing heavily in this model, with 202 of the 236 new restaurants opened in 2022 featuring a Chipotlane.

Taking all of this together, Chipotle appears to be a company that is combining solid management execution, ambitious growth plans and innovative customer service models to stand out within its industry. Reliable companies like this often appeal to Ackman, who prefers solid businesses with an established competitive advantage.

Chipotle: Undervalued When Ackman Bought?

Another consideration for Ackman was almost certainly the valuation of Chipotle stock when he made his purchases. The vast majority of Ackman’s stake in Chipotle was purchased in Q3 and Q4 of 2016 when the stock traded around $375-440 per share.

This period of time coincided with a brief but sharp earnings dip that allowed Ackman’s team to purchase the shares at very favorable prices. Since then, shares of Chipotle have more than tripled in price, putting Ackman’s total return on the stock at about 320 percent.

Today, Chipotle continues to trade at high multiples to earnings in expectation of continued fast-paced growth. The current P/E for the stock is 41, while its price-to-cash-flow ratio is 39.

Despite these high ratios, Chipotle’s price-to-earnings-growth ratio is just 1.56, which would indicate a roughly fair to slightly overvalued pricing. Assuming management can execute its ambitious growth plans successfully, however, the stock could still have a great deal of room left to run.

In the next 12 months, analysts expect Chipotle to rise to $1,845, 9.2 percent above its most recent price near $1700 per share. The stock also holds a consensus buy rating from the analysts currently covering it. While today’s investors certainly can’t get the spectacular deal on Chipotle that Ackman did, future appreciation could still make the stock a good investment.

Will Fast Growth Be Sustained?

Investors are already baking in fast growth but will it continue? If management cannot maintain its current pace of new restaurant openings, investors could see the stock fall back to a more moderate valuation.

While investors like Ackman who bought years ago would almost certaintly still have positive returns, those who buy today are at much higher risk of capital losses in the event of slower growth.

Chipotle may also have to incur higher costs to maximize the value of its older restaurants. As noted by management, new restaurants that open without a Chipotlane substantially underperform those with the feature. The company is already planning 10-15 relocations this year to add Chipotlanes to older restaurants. While retrofitting older locations would almost certainly benefit Chipotle in the long run, it could raise short-term operating expenses.

Chipotle’s rising prices may also present a problem for increasingly cost-conscious consumers. Chipotle’s customer base is beginning to trend increasingly toward higher-income guests. So far, this has not had a negative impact on traffic or sales. If inflation continues to weaken consumer spending, however, Chipotle could find itself getting priced out of some guests’ dining rotations.

Is Chipotle Still a Good Buy?

Overall, Chipotle appears to be a good potential buy for investors who are willing to take a chance on high growth with an accompanying degree of risk.

If management hits its 7,000 restaurant target, the stock will likely still have ample room to generate healthy returns. But slower growth reports pose risks of substantial losses.

It’s also worth noting that Chipotle has managed its expansion plans so far without taking on long-term debt, making it a bit of a rarity among today’s hot growth stocks. Even if the company has to take on debt to fund future restaurant openings, this commitment to prudent fiscal management will likely serve Chipotle well as it continues to grow.

For Bill Ackman, the stock seems to remain a solid holding. The billionaire investor’s position in the company has generated huge returns, and it seems that he intends to hold onto his current shares for the foreseeable future. Given Chipotle’s potential for future growth and strong presence in the fast-casual food space, Ackman’s favorably priced stake could continue to appreciate in value in the years to come at minimal risk levels.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.