Bill Ackman and his hedge fund, Capital of Pershing Square (OTC: PSHZ.F), are well-known investors. The billionaire is a recognized investor thanks to his frequent appearances on popular financial news networks and his reporting in other publications. But some may be surprised to learn that his hedge fund owns just eight stocks – and just seven companies.
Pershing Square Capital’s current holdings are as follows.
|
Pursue |
Percentage of portfolio |
|---|---|
|
Chipotle Mexican Grill |
18.3% |
|
Restaurant Brands International |
17.6% |
|
Hilton Hotels |
16.2% |
|
Howard Hughes Holding |
15.1% |
|
alphabet (Class C Shares) |
12.8% |
|
Canadian Pacific Kansas City |
11.5% |
|
alphabet (Class A shares) |
5.9% |
|
Lowes |
2.7% |
Data source: Whale Wisdom. Note: Due to rounding, percentages do not add up to 100%.
Some investors may be alarmed by the lack of diversification in his portfolio, but Ackman’s strategy has worked well over the long term. In addition, some may doubt that it lacks artificial intelligence (AI), especially since it does not have artificial intelligence (AI). Nvidia (NASDAQ:NVDA).
The only real AI exposure in its portfolio is alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL)which is currently still primarily an advertising company.
Why don’t Ackman and Pershing Square Capital own Nvidia?
Nvidia does not comply with Ackman’s Rule #1
Any assessment of Ackman’s style will clearly show that he is a value investor, following in the footsteps of perhaps the most famous investor of all time: Warren Buffett. His best prerequisite for deciding whether to buy a stock is that the business is “simple and predictable.”
Any investor following Ackman’s Rule #1 would therefore refrain from buying most AI-related stocks, including Nvidia. However, at its core, Nvidia is pretty simple. Its main products, graphics processing units (GPUs), are computing hardware that can perform large amounts of calculations in parallel. This makes GPUs ideal for handling computationally intensive tasks such as displaying the complex and rapidly changing graphics of modern video games as well as training and running the latest generative AI models. Ultimately, Nvidia’s business model is simple: sell more GPUs.
Unfortunately for investors, the company’s revenue trajectory is anything but predictable. Before the generative AI arms race that sparked Nvidia’s recent sales boom, Nvidia suffered from the cryptocurrency market crash. Its GPUs can also be used to mine Bitcoin and a few dozen other proof-of-work coins. So when the crypto winter came in 2021, this source of demand dried up.
Chip manufacturing is a cyclical business and demand for Nvidia products will decline from time to time. This includes demand for the types of GPUs currently used to power AI models. Ultimately, so much infrastructure will be built that Nvidia will no longer have to produce as many GPUs. But when this will happen is anyone’s guess, making the business unpredictable.
However, this is pretty much the only Ackman rule that Nvidia violates.
Ackman’s other preferences
Ackman lists other factors on his checklist for possible investments. Among them, he likes companies that are dominant in their field, operate in industries with high barriers to entry, generate high returns on capital and have excellent management. These are all characteristics that Nvidia demonstrates. So why doesn’t Ackman own its shares?
Because Ackman doesn’t break his No. 1 rule. Even if an investor sometimes ignores some of his other investment rules, he should never deviate from the core principle of his portfolio. Ackman understands his investing style and has done well with it, so it wouldn’t be wise for him to get involved in growth investing.
In summary, Ackman and Pershing Square don’t own Nvidia because it doesn’t fit their style.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Keithen Drury holds positions at Alphabet. The Motley Fool has positions in and recommends Alphabet and Nvidia. The Motley Fool has a disclosure policy.
Billionaire Bill Ackman Owns 8 Stocks — And This Artificial Intelligence (AI) Hypergrowth Stock Isn’t One Of Them was originally published by The Motley Fool