Pershing Square Holdings (PSH): Getting 1 Dollar for 70 Cents
As you know, we are active, focused investors here at Globescan, meaning we concentrate on investing in specific businesses where we believe there are significant barriers to competition, paired with long runways for growth. As such, it is rare that we will invest in other investment vehicles, such as equity mutual funds or investment partnerships.
That said, there are times when significant investment opportunities present themselves to us through these vehicles, in which case, we are both willing and able to take advantage of them.
One space that is ripe for these opportunities are closed end funds which often trade at a discount to their net asset value (NAV). For example, in a very simplified case, we could imagine a closed end fund that owns a single asset, say a share of Google. Since Google is a liquid, publicly-trade stock, we can look up its value easily, currently around $1,000 per share. However, for various reasons (liquidity, management fees, etc) the closed end fund vehicle (which only owns Google) might trade in the market for $900, a 10% discount to its holding of Google.
This brings us to today’s stock write-up, Pershing Square Holdings (PSH), which is the publicly listed investment vehicle for Bill Ackman’s famous activist hedge fund, and as close to that simplified Google example as you could imagine:
PSH is listed as investment trust, not a normal mutual fund. An investment trust is a company that happens to only invest in stocks. This means that the capital it has to invest is permanent capital: it is not subject to investor inflows/ outflows and therefore can be invested with a genuinely long-term mindset. Most mutual funds must be conscious that investors could redeem their cash at any point- this is not a concern at PSH.
One of the main implications of this investment trust structure is that the share price can be above or below the actual value of the underlying positions.
PSH’s investment philosophy is very similar to our own, they take a small number of concentrated positions in high quality, cash generative positions, however they do so with an activist tilt, changing management/ strategy to drive returns. This strategy has produced excellent long-term returns.
Their portfolio contains only around 10-12 positions. All US listed, all mid/ large cap, all publicly traded.
PSH suffered a terrible run of performance recently due to straying from its investment philosophy in a number of highly publicized missteps (JC Penny, Valeant, Herbalife). This has created a huge amount of negative sentiment towards the name.
This negative sentiment has pushed the share price down to a level that PSH is now trading for around 70% of its intrinsic value. PSH shares are trading in the market at around $18, but the value of the investments within PSH is $24.92. This means that if PSH were wound up today, all the positions sold and the cash returned to shareholders, shareholders would realize a c30% gain immediately.
Why We Believe this Discount Will Close
Management have been open and honest about past mistakes, and as such, have re-positioned the portfolio, whilst also buying back 25% of the outstanding share capital, along with investing over $100m of their personal capital in the firm. Management now owns 20% of the outstanding shares, truly putting their money where their mouth is, as well as aligning their interests with that of the shareholders.
Since PSH is listed only in London and Amsterdam, they are not allowed to market the fund in the US due to the listing rules- as such, most US investors do not even know this opportunity exists. Furthermore, European investors often lump PSH in with other investment trusts- not accounting for their focused strategy, obvious underlying value and concentrated portfolio of high-quality stocks.
As management continues to buy back shares, creating value, and the story continues to gain more traction worldwide, we believe the unjustified discount will close. And even if it doesn’t, the quality of the underlying investments here provide us with a significant margin of safety and growth potential. In fact, the underlying performance of the PSH stock positions is +40% year-to-date, while their discount to NAV has only gotten larger.
As this performance continues, investors will recognize that these great companies, along with the great management team, shouldn’t be trading for 70 cents on the dollar. PSH is a great example of a confluence of factors leading to a substantial mispricing of an asset by the market, that we are happy to take advantage of.
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