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The Bill Ackman Report: About His Biggest Position

Jeff Bailey

Activist fund manager Bill Ackman, of Pershing Square Capital, has been hogging the headlines in recent months due to two noisy investment situations: his backing of Apple Guy Ron Johnson as the disastrous CEO of J.C. Penney (JCP), a stock Ackman says he will exit at what could be close to a 50% loss; and Herbalife (HLF), which Ackman regards as a pyramid scheme and some other famous investors regards as a good opportunity.

Pity, as Ackman is perhaps most worth following for his largest – and yet unheralded – position, in Canadian Pacific Railway (CP). According to Ackman’s 2Q letter to his investors, his funds began acquiring Canadian Pacific September 23, 2011, and in doing so brilliantly called a bottom in the shares, which had rallied wonderfully since. See that dip, and then the stock chart's sudden rise? That’s Ackman.

CP Chart

NYSE:CP data by YCharts

Canadian Pacific, since Ackman piled in, has also smoked other railroad stocks.

CP Chart

NYSE:CP data by YCharts

Ackman in June said he’d sell up to about 30% of the Canadian Pacific stake, as the stock’s rise had propelled it to account for more than 25% of his total holdings. But he added: “Even after these sales, we expect to remain CP’s largest shareholder and for CP to remain one of our largest investments over the coming years as he turnaround story continues to play out.”

Ackman believes Canadian Pacific operates efficiently and is thus preferred by shippers to other rail and trucking options in its markets. The rise has made the stock a tad pricy, based on forward PE ratio; before he bought in, the company traded in closer valuation company with CSX (CSX), Union Pacific (UNP) and Norfolk Southern (NSC).

CP Forward PE Ratio Chart

CP Forward PE Ratio data by YCharts

Worth it? Canadian Pacific’s growth has outclassed rail competitors.

CP Revenue TTM Chart

CP Revenue TTM data by YCharts

What about the future? All the rail companies, coming out of the economic crisis, have been amping up capital expenditures.

CP Capital Expenditures Quarterly Chart

CP Capital Expenditures Quarterly data by YCharts

To date, competitors seem more efficient in their investments, measured in return on invested capital. But perhaps Ackman sees Canadian Pacific reaping large rewards on its more recent spending.

CP Return on Invested Capital Chart

CP Return on Invested Capital data by YCharts

Ackman quotes Warren Buffett on occasion (who doesn’t?), and in Berkshire Hathaway (BRK-B) there is a fellow railroad admirer, the conglomerate having outright bought BNSF years ago. It’s the ultimate moat-protected industry. The rights of way and land holdings required to put together a rail network are an enormous, perhaps insurmountable, barrier to entry.

Ackman may continue to garner attention for investments in more dramatic situations, but the Canadian Pacific position is the stuff reputations are made on.

Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at editor@ycharts.com. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.