Looking for Layups When Times Get Tough

Did you lose money last year?

Probably not.

Had you invested in bitcoin, a whole host of stocks or even real estate, you’d have done pretty well.

But what about in 2018? How are you holding up?

Maybe it’s too early to ask. But be prepared for the good times to be over.

Take it from activist investor Bill Ackman. When the going gets tough, it’s really tough.

No longer betting on zero

Over the past few months, the media has portrayed Ackman as too smart for his own good. He famously took a short position on Herbalife Ltd [NYSE:HLF].

According to Ackman, the global nutrition company is a pure pyramid scheme. He even teamed up with director, Ted Braun, to shoot the documentary Betting on Zero attacking the company.

It’s a great doco, I highly recommend it.

The aim was to convince the public that Herbalife is a fraud. But it’s yet to have convinced the masses. Or, at least their customers. Since 2016, Herbalife is up more than 82%.

And it seems Ackman has finally given up his crusade against the multi-level marketing businesses.

Reuters wrote yesterday:

On Wednesday there was little fanfare when the hedge fund manager let slip to a cable news reporter that his Pershing Square Capital Management was no longer betting against Herbalife.

Along the way, Ackman has also had a few more public losses, dragging down the performance of his fund.

But now, it would seem Ackman is going back to basics.

Let me explain why you should do the same…

Too smart for your own good

Bill is no scrub.

The activist hedge fund manager got into the investment game early on. Straight out of Harvard, Ackman and his friend started Gotham Partners.

They both invested what little they had in stocks. In his early experiences, Ackman got a feel for activism.

This is where an investor builds up a holding within a company and then pressures management for action. This might be to buy back shares with excess cash, or it could be to sell off poor performing assets.

Because the activist has a stake in the company, their interests are aligned with shareholders. So if the activist benefits, so too do the shareholders.

Of course managers can’t stand this style of investing. But anything that reminds management that they’re the subjects of shareholders is a pretty good idea in my eyes.

For a long time, Ackman was looking for companies with terrible managers. By strong-arming management to do the right thing, he could unlock value for shareholders and himself.

But did Ackman get a little too confident along the way? 

Last year, Ackman sold one of his worst investments ever. As reported by Bloomberg:

Bill Ackman’s revelation on Monday that he had dumped his stake in Valeant Pharmaceuticals International Inc. after it had dropped from $260 to $11 in the space of a year and a half — and, according to Bloomberg, cost Ackman’s hedge fund more than $4 billion — has already provoked a good deal of excellent commentary.

‘…Although Pershing Square’s overall performance has been quite good since its inception in 2004, Ackman’s track record is littered with huge bets that went bad.

In 2007, he set up a $2 billion fund specifically to target, er, Target. It crashed spectacularly.

In 2010, Ackman bought 39 million shares of J.C. Penney Company Inc., got a seat on the board, brought in a new chief executive, got rid of that CEO a few years later, got off the board, and sold his shares for a loss of over $600 million.

But we all make mistakes right?

Even Warren Buffett has his fair share of losses.

In 2008, when stock prices were depressed, Buffett thought ConocoPhillips, an American energy company, was an amazing buy.

But what the Oracle of Omaha didn’t foresee was potentially a massive drop in oil prices. ‘I in no way anticipated the dramatic fall in energy prices that occurred in the last half of the year,’ Buffett admitted.

He put US$7 billion into the company, which almost halved, rapidly.

So how can you avoid the mistakes of Ackman and Buffett as volatility picks up in 2018?

Look for Lay-ups

If you were Ackman, you’d probably want to get out of the spotlight.

A few public losses and the ending of his six year feud with Herbalife was enough for investors to take millions out of his fund.

Clearly the better idea is to keep your head down and hit the books.

That’s exactly what Ackman is now doing.

According to Bloomberg, Ackman is getting back to activist investing basics.

His hedge fund, Perishing Square Capital, has continued to build a stake in United Technologies Corp [NYSE:UTX].

UTX is a hundred billion dollar industrialist. They build systems ranging from jet engines to climate control and security for the aerospace industry.

Why is UTX a lay-up for Ackman?

Well, there’s no real strong reason for UTX’s elevators business or climate control technologies to be under the same roof as their jet engine or airplane parts business.

Arguably, you could reason that each division has different needs. Building jet engines is intensive and probably needs a lot more cash than developing climate control systems, for example.

The time horizons and strategies are also likely different among each division.

Thus if you could spin-off these divisions and had separate teams to focus on each, they could potentially operate better than if they were under the one roof.

That’s the idea anyway.

As our market becomes more volatile, it might be smart for you to also go for the low hanging fruit.

That means you’re looking for lay-ups or no brainer investments.

One example could be a stock trading at 1-times earnings that could easily continue to grow earnings into the future. Or it might be a company that’s trading at a heavy discount to their asset values.

These kinds of investments aren’t always easy to find. But it’s obvious they’re worth the investment when you do find them.

Just one or two of these lay-ups might end up making your year.

Hopefully United Technologies can change Bill’s fortunes as well.

Kind regards,

Härje Ronngard,
Editor, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Fat Tail Investment Research, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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