Billionaire hedge fund manager Bill Ackman is preparing to launch a new closed-end fund this summer, Pershing Square U.S., with plans to invest $10 billion into new stock positions. This significant capital deployment comes at a time when the S&P 500 is trading at an all-time high, and valuations are broadly considered expensive, yet Ackman maintains that tremendous value is available in the market.
A Contrarian Stance on Market Valuations
Many investors view the S&P 500’s current position and its forward P/E ratio of 20.4 – notably above its historic average in the mid- to high teens – as an indicator of an overpriced market. However, Ackman, who oversees approximately $20 billion through Pershing Square, is taking a decidedly different stance. He argues that the market’s high P/E is largely concentrated in a handful of megacap companies, which he believes are well deserving of their current valuations.
In a recent interview, echoing sentiments from his latest letter to Pershing Square Holdings shareholders, Ackman stated, “Some of the best businesses in the world have become available at some of the lowest valuations in their history.” This perspective underpins his strategy to rapidly deploy the $10 billion raised from the new fund’s initial public offering within weeks of its launch.
The Case for Megacap Quality and Growth
Ackman’s investment philosophy centers on identifying companies with “durable structural advantages,” a concept akin to Warren Buffett’s ‘competitive moats.’ These are businesses that benefit from immense scale, dominate their respective industries, and possess ample capital to invest in transformative megatrends such as artificial intelligence (AI). He contends that these characteristics enable them to achieve rapid earnings growth, a trend expected to continue for years.
Illustrating this approach, Ackman recently added shares of Meta Platforms (NASDAQ: META) to Pershing Square’s portfolio. This move followed a sell-off driven by concerns over Meta’s capital expenditure budget. Similarly, he increased his stake in Amazon (NASDAQ: AMZN) when investors reacted negatively to its substantial $200 billion spending plans. Both companies, despite their significant investment outlays, present compelling value propositions in Ackman’s view.
Meta currently trades at an attractive 22 times earnings, while Amazon, having recovered from March lows where it traded at a P/E of just 26, now stands at 32 times earnings. Ackman highlights that both Meta and Amazon are capable of growing their earnings per share by more than 20% per year over the medium term. This demonstrates his willingness to “pay up for quality stocks with excellent growth opportunities,” emphasizing that value isn’t solely found in low-multiple stocks.
Anticipating Favorable Market Tailwinds
Beyond individual company fundamentals, Ackman foresees several macroeconomic tailwinds supporting market performance in the second half of the year. He points to the ongoing conflict in Iran as a significant source of market uncertainty, particularly its impact on oil prices and, consequently, inflation rates. However, he believes that the potential downside from this geopolitical situation is “practically priced in,” with expectations for further interest rate cuts having significantly worsened over the past six weeks.
As clarity emerges regarding the conflict, Ackman suggests that stocks could continue their upward trajectory. The strong underlying fundamentals and growth potential of high-quality businesses like Meta and Amazon are deemed sufficient to carry their stock prices higher, allowing investors to patiently await an improvement in broader market sentiment.
Additionally, Ackman anticipates that the first full year of operations under the new tax code could positively influence corporate earnings. This regulatory environment may also stimulate increased deal activity and greater capital expenditures by companies, further supporting secular growth trends. His focus remains steadfast on a select group of the highest-quality investment opportunities, which he increasingly identifies among the world’s largest and most robust corporations.
Ackman’s bold $10 billion investment plan underscores a conviction that even in a seemingly expensive market, discerning investors can uncover substantial value by focusing on fundamentally strong, growth-oriented companies with durable competitive advantages. His strategy suggests a long-term outlook, banking on the resilience and growth potential of market leaders to deliver returns irrespective of short-term market fluctuations or geopolitical uncertainties.
