Pershing Square Holdings (LSE: PSH) is the listing FTSE 100 vehicle for billionaire investor Bill Ackman’s hedge fund.
In the third quarter, Ackman increased his stake in Google’s parent company. Alphabet (NASDAQ:GOOG)(NASDAQ:GOOGL).
Why did he do this? And now it’s a Footsie stock you should buy more of? We’ll see.
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 believe will generate returns.
They may use derivatives to hedge or leverage positions, and they may short sell and use debt. Therefore, the profits, but also the losses, can be huge, which is a risk, and there is a higher possibility of volatility with such strategies.
Pershing Square’s portfolio typically consists of 8 to 12 large North American stocks. In addition to this, there is often a hedging strategy to mitigate market-related risk or take advantage of profit opportunities.
Now, it is rare that small individual investors (like me) can invest their money alongside big-name hedge fund managers like Bill Ackman. But this FTSE 100 stock offers precisely that opportunity.
Loading Alphabet Stock
Regulatory filings show the fund nearly doubled its stake in Alphabet Class A shares during the third quarter. The value of that participation was equivalent to 570 million dollars.
He already owned 9.38 million Alphabet Class C shares, which do not grant voting rights to shareholders. That stake was worth $1.2 billion at the end of the quarter.
Why are Ackman and his team so bullish on Alphabet?
A fruitful choice
Well, Alphabet ticks all the boxes Ackman looks for in a company. Notably, it’s a large, capital-light business generating strong revenue growth.
This was evident in the company’s third quarter. Advertising revenue on both Search and YouTube grew 11% year over year, accelerating from low-to-mid single-digit growth in the first and second quarters. YouTube is the number one streaming destination on connected TVs.
Meanwhile, Google Cloud grew 22% and posted its second consecutive quarter of profitability. Ackman believes margins should expand significantly in this division as it catches up to more profitable peers like AmazonIt’s AWS.
Additionally, Alphabet has almost $110 billion on its balance sheet. This can be put into practice by buying back shares to increase profitability metrics such as earnings per share (EPS).
Looking ahead, generative artificial intelligence (ai) chatbots like ChatGPT remain a potential threat to your search business. But for now, Google remains as dominant as ever.
Alphabet shares have risen 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 investing more money?
Pershing Square shares are currently changing hands for £31. This means they are trading at a hefty 35% discount to the fund’s net asset value (NAV).
Surprisingly, this attractive discount persists even though the share price has nearly tripled in five years.
Beyond Alphabet, it also has large stakes in universal music groupthe world’s leading music company, and Hiltons around the world.
I really want to buy more shares of this FTSE 100 because I think they are still significantly undervalued.
