Billionaire investor Bill Ackman just poured $2.2 billion into these two incredible stocks

Bill Ackman likes to buy stocks when he believes they are for sale, and he holds them until their prices reflect their true value. That could be a few months or a decade. Ackman, for example, established a position in Chipotle Mexican Grill more than eight years ago and has become one of the largest holdings in the portfolio of his hedge fund Pershing Square.

Over the past two quarters, Ackman has established two new significant positions for Pershing Square – Nike (NYSE:NKE) and Brookfield (NYSE: BN) – The company invested an estimated $2.2 billion in these stocks in the third quarter alone. Here’s why.

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Nike

Ackman bought approximately $275 million worth of Nike shares in the second quarter of the calendar year, but increased in the third quarter of the calendar year after Nike’s fourth quarter 2024 earnings results and fiscal 2025 outlook disappointed the market in late June 2024 had. Ackman added 13.2 million shares and over $1 billion in expenses based on the average stock price during the quarter.

Nike has recently had difficulty determining the share of direct-to-consumer sales in total sales. Cutting back on wholesale distribution in favor of its own stores and website worked in some areas, but it hasn’t worked so well lately, forcing management to make adjustments. As a result, there was a short-term decline in sales as sales through major retail partners declined while Nike shifted inventory to its own channels. Sales came in worse than expected, with revenue falling 10% year-over-year in Nike’s first quarter of fiscal 2025. When reporting the results, management assumed a slow recovery in sales due to economic uncertainty.

However, it is worth highlighting that gross margin improved by 1.2 percentage points in the fiscal first quarter due to optimized product and inventory spending as well as strategic pricing improvements. As Nike improves its inventory management and returns to revenue growth, the company should see significant improvements in both gross margin and operating margin over time.

Nike’s price-to-sales ratio is near its 10-year low at about 2.3. And even if sales are currently trending in the wrong direction, there are good reasons to believe that the situation will change. Nike has one of the strongest brands in the world, China continues to offer growth opportunities for its business and has maintained its premium pricing. With earnings growth expected to rebound after this year, Nike could be a good stock to buy now and hold for several years as the company transitions through its business model.

Brookfield

Brookfield is an investment firm that operates in many different businesses. The company has an extremely strong track record, providing shareholders with an average annual total return of 18% over the past 30 years.

Ackman invested about $285 billion in stocks in the second quarter and added about $1.2 billion more in the third quarter. Thanks to strong stock performance since Ackman’s purchases, Brookfield is now Pershing Square’s largest stock position.

The company spun off its asset management business last year but still maintains a 75% stake in it. In addition, the company operates an insurance business (asset solutions) and owns several companies in infrastructure, renewable energy, business services and real estate. Brookfield expects to further expand this portfolio over the next few years.

The Company seeks to acquire businesses where it believes it can create additional value through operational and capital improvements. It does this by taking cash flow from its existing operations and deploying it wherever it sees investment opportunities.

Management expects free cash flow growth to increase at more than 20% annually over the next five years. If this prediction proves accurate, it would result in total free cash flow over that period of a whopping $47 billion, of which the company plans to retain 75% ($36 billion) for new investments. The rest will be used for share buybacks and dividends.

Shares currently trade for around 15 times distributable earnings. Management expects the stock to trade at a multiple of 23 today, suggesting investors are getting a significant discount on the stock. Additionally, growth in distributable earnings over the next five years is expected to result in the stock having a fair value of $176 per share in 2029. That would equate to an average compound annual return of more than 25% over the next five years, according to the stock price as of this writing.

It remains to be seen whether Brookfield can take advantage of the investment opportunities it is seeking. Ackman seems confident that there is still a lot of growth ahead for the company and that it could deliver the returns management has predicted.

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*Stock Advisor returns as of November 18, 2024

Adam Levy does not hold a position in any of the stocks mentioned. The Motley Fool has positions in and recommends Brookfield, Brookfield Corporation, Chipotle Mexican Grill and Nike. The Motley Fool recommends the following options: Short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has one Disclosure Policy.

Billionaire Bill Ackman Just Poured $2.2 Billion Into These Two Incredible Stocks was originally published by The Motley Fool