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Bill Ackman's Pershing Square Capital Books Gains With Chipotle and Starbucks

GuruFocus.com

- By Stepan Lavrouk

Previously, I discussed some of the bigger winners for Bill Ackman (Trades, Portfolio)'s Pershing Square Capital - his credit default swap bet against the stock market in March and home improvement retailer Lowe's (NYSE:LOW). Two other solid performers in the fund's portfolio were Chipotle Mexican Grill (NYSE:CMG) and Starbucks (NASDAQ:SBUX) - here's what accounted for their gains.


Between Jan.1 and Aug. 25, Chipotle and Starbucks are up 8% and 3.7% respectively. While these might not sound like earth-shattering returns, they are impressive in a context where food and drink consumption have fallen. Here's why these brands have outperformed the economic weakness.

Chipotle

Ackman has been bullish on Chipotle for a while now. In fact, he used the controversy over food safety that was causing the chain such significant headaches a few years ago as a justification for his claim that it was undervalued at the time. And, to give credit where credit is due, Chipotle eventually shrugged off those troubles, demonstrating that it's possible to find undervalued opportunities in the public markets.

More recently, Chipotle's rise has been due to the company's successful implementation and expansion of its digital ordering system. Per Ackman:


"Management's rapid response has caused the company's digital sales mix to increase from just under 20% of sales at the end of 2019, to a peak of 70% of sales in April, moderating to nearly 50% of sales in July, as states have reopened. These digital sale gains have proved to be resilient, with Chipotle retaining 70% to 80% of digital sales gains while recovering 40% to 50% of in-store sales as of July. The combination of triple-digit digital sales growth and a gradual recovery of in-store sales has enabled Chipotle to return to mid-single-digit, positive same-store-sales growth in July, an exceptional result in the current environment for a brand that did not previously derive a majority of sales from drive-thru or delivery".



Starbucks

In a similar vein, Starbucks has been able to perform well by improving its digital ecosystem. Interestingly, Pershing Square actually sold its stake in Starbucks back in January (after generating a total 73% return for shareholders). After the selloff in March, Starbucks declined to an attractive enough level for Ackman to jump back in. Even though the stock is only up 3.7% since the start of the year, Pershing has netted a 39% in investor returns from its average cost of share purchase.

It has also helped that Starbucks' main Chinese competitor, Luckin Coffee, is embroiled in an accounting scandal and has been delisted from the Nasdaq. Pershing was able to use the turmoil earlier this year to pick up shares in fundamentally quality businesses - so far it seems to have worked out.

Disclosure: The author owns no stocks mentioned.

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This article first appeared on GuruFocus.