This past week Bill Ackman’s Pershing Square revealed at the Grant’s Fall Conference a 1.1% stake in Starbucks Corp. (SBUX). However, the hedge fund’s performance has been less than inspiring in recent years with big flops along the way.
Taking a closer look at the fund’s performance since 2006 one may have been better off investing in the S&P 500 total return index which has outperformed the billionaire investor.
Bill Ackman is known for taking large concentrated bets in his portfolio. Currently, WhaleWisdom values his portfolio at roughly $5.8 billion as of June 30. In total the portfolio only holds eight stocks, not including Starbucks. With its largest position being Automatic Data Processing Inc. (ADP) at a total value of $3 billion which is a massive bet at nearly 50% of the portfolio’s asset under management.
Big Rise, Big Fall
However, that doesn’t tell the whole tale of the fund’s rise and fall. In the fourth quarter of 2005 the fund’s portfolio was valued at $365 million and by the fourth quarter of 2014, it had grown into a $16 billion behemoth. It all changed quickly when investments such as Valeant – now Bausch Health Companies Inc. (BHC), went sour reducing the fund to its current value.
Since the second quarter of 2006 Pershing Square has had a total return of approximately 182% compared to the S&P 500 total return index of 186%. What may be even worse, over the past three years Pershing has an Alpha of -1.35, which is a measure of the excess value generated by the portfolio against a benchmark. Additionally, the fund has had an annualized performance over the past three years of -2.32%.
Starbucks is a Struggling Company
Given the recent string of bad luck, it doesn’t make Ackman’s investment in Starbucks a slam dunk at all. Starbucks has struggled significantly over the last few years as same-store comparables in North America have slowed considerably. As a result, analysts estimate that revenue growth for the company will slow from 10% in fiscal 2018 to just 6% in fiscal 2019. Earnings growth is expected to slow from 16% in 2018 to only 10% in 2019.
Pershing is betting that growth for the company will accelerate because at its current valuation the shares are trading at 19 times fiscal 2020 earnings estimates of $3.00 per share. However, even in the year, 2020 analysts estimate growth of 14% which gives the stock a growth adjusted PEG ratio of 1.35 making the stock fairly valued at best.
Betting that the shares of Starbucks will rise because of Pershing’s investment make it a risky gamble.