Some investors might see the S&P 500 (^GSPC +1.20%) sitting at an all-time high and think there’s not a lot of value to be found right now. Bill Ackman is looking at it and asking investors to give him $10 billion to deploy in some of the best opportunities he sees.
The hedge fund manager is preparing for the initial public offering of a new closed-end fund, Pershing Square U.S. The fund will trade publicly starting this summer after a dual listing with Pershing Square, the fund management company Ackman runs, which currently oversees about $20 billion in assets.
Ackman says he plans to deploy the cash raised from the IPO within a matter of weeks, and he thinks right now is quite a good time to invest.
Image source: Getty Images.
There’s value in this market hiding in plain sight
“Some of the best businesses in the world have become available at some of the lowest valuations in their history,” Ackman said in a recent interview. The statement echoes comments from his most recent letter to Pershing Square Holdings shareholders.
While many look at the current valuation of the S&P 500 and think it’s overpriced, Ackman still sees tremendous value. The S&P 500 recently traded at a forward P/E ratio of 20.4, well above its historic average in the mid- to high teens. That high P/E is largely due to the concentration in the index among just a handful of companies that typically carry higher-than-average P/E ratios.
Ackman points out that these companies are well deserving of higher valuations, as they benefit from “durable structural advantages,” or what Warren Buffett might call competitive moats. These megacap stocks all benefit from massive scale, dominate their respective industries, and have ample capital to invest in megatrends such as artificial intelligence (AI). As a result, they’ve been able to grow their earnings relatively quickly and should continue doing so for years to come.
Ackman recently added shares of Meta Platforms (META +1.81%) to Pershing Square’s portfolio following a sell-off in shares related to concerns around its capital expenditure budget. He added to Amazon (AMZN +0.34%) when investors reacted similarly to its $200 billion spending plans.
Today’s Change
(1.81%) $12.27
Current Price
$689.14
Key Data Points
Market Cap
$1.7T
Day’s Range
$675.14 – $691.52
52wk Range
$479.80 – $796.25
Volume
1.2M
Avg Vol
16M
Gross Margin
82.00%
Dividend Yield
0.30%
Both stocks are trading at relatively low P/E ratios, especially considering the growth potential for the companies. Amazon has made a strong recovery from its March lows, when it traded for a P/E of just 26. It now trades for 32 times earnings, which remains a fair value. Meta’s earnings multiple still trades for an attractive 22 times earnings. Both companies are capable of growing their earnings per share more than 20% per year for the medium term.
Those are just two examples of how Ackman pays up for quality stocks with excellent growth opportunities. Stocks don’t have to trade at low multiples to offer great value for investors.
A great environment to invest in
Ackman argues that the second half of the year will bring some great tailwinds for investors. Even after the S&P 500 recovered to an all-time high, there remains significant uncertainty about the war in Iran. As we gain more clarity on the situation, stocks can continue to rise.
The conflict in Iran remains a major challenge for markets, as its impact on oil prices reverberates through just about everything else. If inflation rates remain elevated because of it, it could result in higher-than-expected interest rates set by the Federal Open Market Committee. And higher interest rates mean lower earnings multiples. At this point, however, the downside is practically priced in, with expectations for further rate cuts significantly worsened over the past six weeks.
Importantly, buying high-quality stocks such as Meta and Amazon at their current valuations presents such a good opportunity that investors will be able to wait for market sentiment to improve further. The underlying fundamentals and growth potential of those businesses are strong enough to carry the stock prices higher.
Ackman also sees the potential for the first full year of operations under the new tax code to have a positive impact on corporate earnings. It could also boost deal activity, in addition to increased capital expenditures by companies, which can support secular growth. Still, he’s focused on just a handful of the highest-quality investment opportunities, which he increasingly finds among the largest companies in the world.
