Interactive Investor

Bill Ackman: what I think of GameStop and shareholder activism

6th May 2021 19:19

Lee Wild from interactive investor

The so-called investor revolution in January generated massive gains and huge losses for investors. Hear what star investor Bill Ackman thinks of it all. He also explains his approach to shareholder activism and ethical investing.

Lee Wild, head of equity strategy, interactive investor: Hello. Today I have with me Bill Ackman, one of the world’s best-known investors and the man behind hedge fund, Pershing Square Holdings (LSE:PSH), now a FTSE 100 company. Now hello, Bill, thanks for joining me.

Bill Ackman, founder and chief executive Pershing Square Holdings: Sure, thanks for having me.

Lee Wild: Now one of the big highlights, or talking points, of the year so far has been the GameStop (NYSE:GME) event and ongoing stock volatility there. What are your thoughts on retail investor activism like this?

Bill Ackman: First of all, you know, it looks to me, as a person who’s used to taking an active role in companies, that there’s a real activist at work here. You know, this management team has been completely transformed, there’s a new major shareholder who’s got a track record in online selling and so on and so forth, it’s been a meaningful investment in the company. They’ve taken advantage of their – I think they did an equity offering, I’m not following it that closely but I think they sold some stock to raise cash, you know, I think they’re redoing some of their debt. So what’s interesting is the higher stock price actually itself creates value, and you’ve got a new management team, the old CEO has gone, they replaced a whole bunch of people with people from Amazon and other places. GameStop has an existing customer base of significant scale. 

So in all of the GameStop stories it’s always about how retail’s paying a stupid price for the company. Now again, all this is being said, I’ve not done the work, but it looks to me like a lot of interesting things are happening at GameStop. All that being said, you know, they’ve got a legacy in terms of a large number – you know, they’ve got a footprint of stores around the country that they’re going to have to either repurpose or get rid of, but you can envision people going into GameStop stores for competitive gaming events, for the socialisation of it. So I have no idea, but I think it does show you the power of retail to move stock prices, you know, the biggest investor in the world is retail, it’s not the institutions, and they are the marginal buyers and sellers, or they can be.

I do think – I’ve yet to read someone actually do the analysis, you know, a story about, you know, a deep dive on why GameStop might actually be worth whatever it’s trading at, I have no idea, but it could be, it’s possible.

Lee Wild: Well, I mean, it’s happened once, it can happen again, I guess.

Bill Ackman: Yeah, sure. What I would say is the most significant thing is, Pershing is not a short selling firm, we’ve shorted a couple of stocks in our history, and the last one we did I foreswore short selling thereafter. And just being in a position where you’re short of security that could go to any price, and as we know, stocks can trade at any price in the short term, is a risky proposition, it’s not for the faint of heart, not that I’m faint of heart, but I’m faint of heart with respect to short selling, it’s become a very risky business. 

I noticed in the opening you call Pershing Square Holdings a hedge fund, we don’t look like any other hedge fund, right, we don’t have a big short book, we operate margin leverage, we own only 10 securities, we don’t trade a lot, our 13F [quarterly disclosure form] doesn’t change much, you know, we have some positions we’ve held for 13 years, others a decade, so I describe us as investment holding company. I compared us to the traditional conglomerate, you know, Buffett did a comparison in his letter, Berkshire Hathaway versus a typical conglomerate. We have some very interesting attributes, if you think about us as a conglomerate, we don’t have the problem of entity level taxation because we’re a currency company, we can buy and sell holdings; we sold Starbucks, we’re not paying any tax on that sale. We can redeploy all of those proceeds into our next investment, and we don’t have a requirement to buy control, which, at least in the US or many jurisdictions, you have to have control of your underlying entities in order to not become an investment company.

So I don’t think of us as a hedge fund, if you will, certainly at Pershing Square Holdings I don’t. We do hedge, so maybe we deserve the historic version of the name, you know, it’s kind of funny, most hedge funds don’t really hedge. You know, we’re an investment holding company that periodically hedges what we think of as ‘black swan’ type risks, whether it was Covid a little more than a year ago or the financial crisis more than a decade ago, and today, you know, I think the biggest risk to market is rates move a lot more than people expect.

Lee Wild: We’ve talked about retail investor activism, now what’s your approach to shareholder voting? I mean, should more smaller investors get involved, are you active in this area, and do you think you can make a real difference on how companies you invest in are run? I mean, is it a good thing, or would you just rather let companies get on with running our business?

Bill Ackman: Enormous value can be created if you have a great business that is under-managed, and you can make changes into the way the business is managed or governed. A great example is Chipotle (NYSE:CMG), you know, four or so years ago Chipotle stock was down almost 50%, and what we did is we bought 10% of the company. We were invited by the Chairman/CEO to put four directors and other directors, to add four directors to the board, two that were affiliates of ours, one of whom came from McDonald's (NYSE:MCD) and was actually at McDonald’s when they owned Chipotle, another former partner of mine who knows a lot about the restaurant space, two other directors that we mutually approved of. And that new board, they became four of eight members of the board, ultimately elected to bring in a new CEO, recruited I think within a year a guy named Brian Niccol. Brian’s been there three years or so, and stock has gone from when he joined, $265, to today, $1,500, and we changed one person and a few directors. Then Brian of course brought in his own team and they had a series of other changes that have enabled that company to create a lot of value.

So if you’re looking, the kind of businesses we like to own other people like to own. We’re not unique in wanting to own a super-durable growth company that you can predict with a high degree of confidence what it’s going to look like over an extended period of time, but we also want to buy it at a good price. It’s rare to buy those kinds of businesses at great prices unless you’re misunderstood or shareholders are disappointed, so it’s really the latter case where we’ve been able to come in. 

We bought Canadian Pacific (TSE:CP) in I think 2012 or so, at a time when everyone hated the company and the management, therefore the stock was at a cheap price. We bought 12-13% of it, and then we brought in a new leader who did an incredible job with the company. The stock is up 10-fold in the last nine years, and it’s a railroad, it’s not a sass software company. So there’s enormous value can be created because, one, you get to a buy at discounted price when shareholders are unhappy, and if you can be an influential shareholder and help steer the company in the right direction you can create a lot of value, and that is, I would say, the essence of our strategy over time.

Lee Wild: What about ethical investing, ESG, environmental, social and governance? Now you’ve been quite vocal about this recently. If you could just tell us what your thoughts are and what the portfolio’s approach to ESG investing?

Bill Ackman: Sure. So we never called it ESG years ago, but we always thought about – you know, we made an investment in the company. A simpler version of this is, “Is this company good for America or bad for America?” right? Our view is, if it’s good for America, you want the tailwinds at your back, right.  If it’s a polluting company, if it’s a company that’s causing harm to the people consuming its products, at the end of the day it’s going to have economic winds in its face, or even regulatory winds in its face. So our view is that good environmental social governance practices produce great economic outcomes over the long term. There are certainly cases where the incremental investments you need to make to source higher quality food for Chipotle, you know, they affect the food costs. Food costs for Chipotle are much higher than for a typical restaurant company, but the marketing costs are much lower. The marketing cost is much lower because it’s a great brand and people understand what the brand stands for, as a result they don’t need to spend a lot of money bringing people in the door.

So if you have the ability to take a long term approach you can be extremely pro ‘what’s good for the world?’ and the rewards are enormous. So we see a lot of alignment between – you know, our principle mission is to create shareholder value, generate attractive returns for our investors, and we think there’s very high correlation between the add-in and following sustainable practices. Then we’re in a world in which a lot of investment capital is moving toward I would say pro-ESG decision making and away from companies that have poor practices, and so that’s a huge tailwind in just the terms of the evaluations that will be assigned to businesses. Think Philip Morris (NYSE:PM), think coal company versus Tesla (NASDAQ:TSLA), look at the value assigned to Tesla because it can be in every ESG portfolio.

Lee Wild: So does ESG form part of your investment approach? So it will be a consideration for every company that fits in the portfolio?

Bill Ackman:  Sure, absolutely, and again, everyone has different views. You know, a lot of ESG portfolios have Coca-Cola (LSE:CCH) in them, and my view on Coca-Cola is it’s probably cost more economic harm than almost any company in the world by its hoarding sugar water and therefore obesity and diabetes all over the world. By the way, I think it’s a great company, it’s very well run, I just don’t love the product and the health implications, but everyone’s going to have their own view, we also own some fast food companies that happen to sell soda. So I think differently, if you will, about a supermarket that sells a whole bunch of stuff, you know, the consumer can choose what they want, or a restaurant that has a spectrum of healthy and less healthy items on the menu, but generally don’t like companies that produce products that I’m not interested in consuming because I’m concerned about the health benefits.  You know, if people sold Exxon (NYSE:XOM) and bought Tesla, which would be like the ultimate ESG trade of 10 years ago, that worked out very, very well.

Lee Wild: And you didn’t do that, Bill?

Bill Ackman: And I did not do that, no. My bad?

Lee Wild: Brilliant. Bill Ackman at Pershing Square Holdings, thanks very much for joining me today.

Bill Ackman: Thank you so much, appreciate it.

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