Trade of the Century?!

 
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Bill Ackman's Trade of the Century

Jody Chudley, Contributing Analyst, The Oxford Club

Jody Chudley

On March 31, I took you behind the scenes of what I thought was the trade of the year.

Now I believe that it was actually the trade of the decade, if not the century.

Here's how it played out...

On March 3, hedge fund manager Bill Ackman notified investors in his publicly traded investment vehicle Pershing Square Holdings (OTC: PSHZF) that he was extremely worried about COVID-19 creating an economic catastrophe.

More importantly, he told investors that he had placed a trade that would protect Pershing Square's investments from this catastrophe and position him and his investors to profit.

Here's exactly what he did...

In late February, Ackman spent $27 million betting that various global investment-grade and high-yield credit indexes would plummet, which is what always happens when sudden, massive economic fear overtakes the world.

In layman's terms, Ackman bought cheap insurance against a stock market rout. Very little money was risked, and if it paid off, it had lottery ticket-level upside.

Of course, we now know that Ackman was correct. In March, the market crashed.

Just three weeks after telling his investors that he had made the trade, Ackman revealed that he had already closed out his "insurance" for a $2.1 billion windfall.

He turned $27 million into $2.1 billion - a 77-bagger - in roughly three weeks.

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A Table-Pounding Buy

When I told you about this trade on March 31, I said Pershing Square Holdings, then trading at just under $18, was a table-pounding buy.

Shares now trade at $27.05, an increase of exactly 50% in six months.

And despite that 50% increase, I believe Pershing Square Holdings is still a buy...

Pershing Square holds a portfolio of blue chip stocks and cash that together are worth $39.26 per share.

Yet today in the stock market, we can buy shares of Pershing Square for $27.05 - a 31% discount.

The stocks in Pershing Square Holdings' portfolio today include Agilent (NYSE: A), Hilton (NYSE: HLT), Lowe's (NYSE: LOW), Restaurant Brands (NYSE: QSR), Chipotle Mexican Grill (NYSE: CMG) and Starbucks (Nasdaq: SBUX).

All good companies - and since Ackman picked those stocks, I'm betting they will perform pretty well in the years ahead.

So why does Pershing Square trade at such a discount?

It likely relates to the fact that Pershing Square Holdings' primary stock market listings are in Amsterdam and London, not in the United States.

Getting Pershing Square Holdings at less than $0.70 on the dollar is a no-brainer.

It sweetens the deal that you also get exposure to Bill Ackman's investing ability, which has thrashed the overall stock market over time.

From January 1, 2004, through the end of August of this year, Ackman generated a total cumulative return of 1,112% for his investors. That is more than triple the 335% return that the S&P 500 produced over the same time period.

The 31% discount and Ackman's long-term track record still make Pershing Square a solid bet.

Good investing,

Jody

P.S. It's clear that COVID-19 has created a unique market environment with as much opportunity for profit as it has for disaster - and not just for investing greats like Bill Ackman.

In fact, Chief Income Strategist Marc Lichtenfeld believes that you could even triple your investment in three months by trading one unique catalyst...

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