Welcome, everyone, thanks for joining. We're going to be talking today again about Bill Ackman. I know we've been talking a lot about Bill Ackman, and I recently did a video on how to pick stocks, like Bill Ackman. What I did in that video is I reverse engineered his stock picking method by looking at commonalities and common traits and all the companies that he invests in. All the ones that he buys and sells have many things in common and that was mostly focused on the fundamentals.
So the things like the ibadah, the free cash. Low, the share BuyBacks. That dividend is the earnings per share growth, so on and so forth. I looked at commonalities. So if you want to see kind of a precursor to this video, you can go back and watch that one. I'll link it in the description, but this video is a follow-up on that one because a lot of people had a common criticism. They said Joseph, it's good that you're looking at all the commonalities in the fundamentals, like the ibadah
and free cash flow. But you know, that Bill Ackman is doing much more research than that. He's not just looking at some fundamentals and buying the companies. He understands the business. He has a whole research team. So we want to see inside of his head. What is he thinking about when he's buying these companies? What is he really considering qualitatively with these companies? So that's what we're going to be diving into in this episode.
We're going to be expanding across that first video from the fundamentals and going more into the qualitative side and to what these companies actually are. Luckily for us. Bill Ackman just recently released the Pershing Square Holdings, 2021 annual, Art. And in this, he gives very in-depth breakdowns and descriptions of specifically what he values in the companies that he's holding. So he's sharing a lot of valuable Insight hair.
I read through some of it and I was pretty Blown Away by the insights that he shares openly. So I want to go through this dissect a little bit and see what we can learn together because you might be asking, why am I paying so much attention to Bill Ackman? Well, frankly, you know, opinions vary, you may not like the guy. You may not like his personality, or CNBC
appearances. Or as vocal, opinions on different subjects, like Ukraine or whatever, I get that some people don't like his personality, but the performance speaks for itself, Bill Ackman is an incredibly good investor. He's one of the best investors alive, the numbers show that if you look at his performance of his fund, this is net of fees. Meaning factoring in the 20% performance fees that he charges
plus. The 16% out performance fees, he charges massive fees in this fund and net of the fees. He's still destroying the S&P 500. Look at this performance overall. These two lines are his performance, that's his fund. And then you look at the S&P 500 below four hundred and eighty, four percent Returns versus 1670 percent. Net of fees that is outperformance to look at it
another way. He's returned 17.1 percent annualized since Inception. Again, that's net of fees compared to the S&P 500's, 10% annualized, and that's not counting in any type of Expense ratio. So he has blown away, the S&P 500, the results speak for themselves, and I do think that he shares valuable advice in this letter. So we have a lot to jump into. Let's go ahead and get to it. So let's go ahead and start off.
First of all with kind of the framework of how Bill Ackman views all the macro events going on. So how he views this through the lens of an investor? We have the war with Ukraine. He says the war in Ukraine is a tragedy watching. Innocent people died due to the political and geographical objectives of 1. And is something one would hope would have never occurred. I think most people can agree with that.
Ukraine is putting up a fierce fight and much of the western world is helping with aggressive, sanctions, military equipment, and funding. But we need to do more Russia has horrific actions must be made to be extraordinarily expensive and punishing for its military and its economy so that we deter and hopefully eliminate such aggression destruction and loss of life in the future. So that's a little bit of his political view on the circumstances in Ukraine.
With Russia, he is he's very much involved in that if you follow his Twitter, he's constantly tweeting stuff in support of Ukraine so that's a little bit of politics, that's where he stands on the issue. He says the economic implications of the war are significant in amplifying inflation and energy, Agriculture and other goods, and services and tempering, the risk appetites of investors and
corporations. The prospects of high inflation deteriorating growth and the potential for the US and Global recession have increased significantly. Russia has become an investable. I think that's obvious. Now, China is not far behind due to their Crackdown on corporations and high-profile CEOs. It's a reason to Ali Baba took a huge nose, dive and their tactic approval of Russia's actions. So China is more on the side of
Russia than the u.s. US companies were already in the process of restoring and nearshoring their supply chains, which will accelerate due to the increasing geo, geo, political and certainty. D globalization is inherently inflationary. Missionary risk premium should also continue to rise. So he's setting a bit of the backdrop. We have War inflation, Rising tensions with the biggest economic power in the world besides us, which is China, right?
The biggest Growing Power and then obviously Russia has completely on investable at this point seems like a bad time to be investing. Now he says why then you might ask do, we remain fully invested. So Bill Ackman is fully invested right now. Despite all those major headwinds And economic factors and he outlines two reasons why he says first. We believe that the business is we own have substantial pricing power, that's a big thing. They always look for pricing
power. That is the ability to adjust prices upward without losing customers to competitors and they also outline. The second thing here, we believe that are hedges will likely generate substantial liquidity, that will enable us to take advantage of opportunities in the event of substantial Market, declines. So this is something that Pershing Square does and Bill Ackman routinely does. Let's so far, I've done. None of. I haven't Minik this Approach at
all. He has Hedges with his portfolio and like a hedge fund. You should probably try to have Hedges and protect the downside. That something that investors are paying them a hefty fee to do. But this is something that I just don't feel great at. I don't feel like I understand Hedges and the risk reward and and kind of how they work. So that's an area that I want to learn about is how to hedge my portfolio and take advantage of
Market declines. So that is something that I'm actively learning about and studying, maybe I'll Implement hedges in my portfolio in the future, but right now I'm just 100% long, I have no Hedges on my portfolio and he says that we believe that hedging is a better alternative to keeping funds in
cash. While one is waiting for opportunities, particularly because High interest rates caused inflation of the purchasing power, and cash to decline rapidly, which is obvious with inflation at six or seven percent. Maybe it will go higher, maybe lower your cash. Is getting eaten up by that either way. Cash is not a good thing to hold
right now. Now he goes on saying the industries and businesses in which we have invested in our highly attractive and well, positioned to withstand negative externalities negative. Externalities is a fancy way of saying, outside forces of macro events and wars and competitors will be withstood by these companies, that is a way that Buffett defines having a moat, a big body of water. Around the castle that fends off competitors.
Right? Well, this is another way of saying, not only competitors but also macro events Wars inflation and so on, they can withstand negative externalities about 30% of our Equity. Portfolio is invested in music and video streaming umg and Netflix. That's video streaming of Music. 26% is in restaurants and restaurant franchising, Chipotle, restaurant Brands and Domino's 15% in a home improvement retailer, you want?
With lows, I currently have Home Depot my dividend portfolio, 10% in real estate in states with substantial in migration. That's the Howard Hughes company he highlights here. That is a real estate company that Pershing Square has, and in Residential, Mortgages Fannie, Mae and Freddie Mac, 10% in hotel. Franchises, which is Hilton and 8% in railroad, which is Canadian Pacific. So, that's a new holding to the portfolio.
We expect the each of these companies will grow their revenues and profitability is over the long term regardless of recent events. And the various other challenges that the world will face over the short intermediate and long-term. So Bill Ackman is a long-term investor. He holds companies for 3 years 5 years, sometimes longer be still continues to see value. He'll hold companies for five years.
Plus what I like about Bill Ackman, when I compare them with investors, like Arc invest with Cathy wood is although she's had good returns. I see her trading every single day with the emails. I get the email updates and they're just trading in and out of stocks. Every two seconds, there's dozens of them being sold and being bought every two seconds. Now compare that with Bill Ackman, and he's not buying and selling companies every single day, he waits until they get to good prices.
He buys in, then he holds them long-term. Now, this next paragraph, I think is interesting. He goes on to highlight why? He prefers investing in North America, in the US over the rest of the world. He explains why he says, while effectively all businesses are exposed to the global economy, we have chosen to invest close
to home. Our portfolio is North American Centric with most to all of our company's profits generated in North America. While the US has its share as a problems, including a highly litigious business environment, a complex, regulatory regimen, and political disharmony and divisiveness. We believe these factors are substantially outweighed by illegal regimen. Where the rule of law is generally respected more.
So in most of the other places of the world, limited corruption, a world-class, Ian defense and a corporate and Capital Market environment. Where capitalism can flourish we believe that these attractive attributes will increase in importance to investors in light of recent events. Much of the same way the world is d. Globalizing d. Globalization appears to be
coming to the capital markets. So I think that in terms of macro events Bill Ackman is not anywhere close to investing in 10 Center Ali, Baba or JD. He does even seem to want to invest outside of the US at all. I think with the globalization, he sees more opportunity in the u.s. than anywhere else, and he spells it out pretty clearly here. Obviously, with my investment in Ali, Baba, just tanking month, after month, primarily due to concerns about the government.
I can see his point here. It doesn't really matter how good your companies are or how good their free cash flow is or so on and so forth. If investors can't trust the government, they'll never give it the multiple or the market cap, or the valuation that it deserves. If it was a US company, they will give it that. In that market cap. So, in hindsight, I agree with him, I'm not making any new investments in the China.
I still have my Ali Baba holding and I'm still holding on to it, but I'm limiting my exposure outside of the US for the same aforementioned reasons. And this next paragraph is where he just really lays out the type of things he looks for. And this is again, many of the type of things that we identified. When we did a reverse deconstruction of his portfolio, we reverse engineered it.
He said, we expect our portfolio companies to continue to Pound their intrinsic values at even higher rates than before due to their current reduced valuations. We believe that all of our portfolio companies will generate long-term durable growth due to their dominant Market positions. Substantial, free, cash flow, generation High Returns on Capital, pricing power and strong balance sheets. Furthermore, and this is something specifically that I pointed out.
Most of our companies, use their free cash flow to repurchase their own shares. So our portfolio companies and their shareholders are The long-term beneficiaries of their recently reduced stock prices because again, as the stock price goes down the share repurchases, carry a lot more weight. While most investment managers prefer to report consistent growing returns to their
investors. We prefer to have intermediate periods of downward volatility as a create opportunities to plant, the seeds for greater long-term out performance. And I definitely think that that's not just investor speak. I really think that he likes these type of periods. You'll probably be doing a lot of buying into these type of He's with this pullback so that's kind of him setting. The foundation of a thought process overall. Now we're going to start jumping into individual companies.
Let's start off with Netflix before I look at what Bill Ackman says. With Netflix in full disclosure, it is one of my largest positions and I'm currently weigh down on this company. So I'm well in the red on it. And that's my fault for buying it at a higher price. I acknowledge that. But I remain very bullish on this company. I've talked extensively about the many attributes that I like of Netflix, did I? It will be a long term, compounder.
I think a lot of the challenges they're facing the issues are going through will be very short-lived. So, even after this company, fell substantially in price because of one bad quarter, their forecast was pretty bad. I continued to buy more of the company. I kind of doubled down on it. I increase my position after the decline. Now, having said that, let's go ahead and look at what Bill Ackman says.
He says, we have long admired, Netflix and had initially research and analyze the company as part of our investment, due diligence. On umg, we then updated and completed our work January. When the stock price decline, due to disappointing subscriber, guidance much like umg, we believe that Netflix is well positioned. As a leading beneficiary of the long-term secular growth and streaming a high quality business overseen, by a
world-class management. Team Netflix established subscription video streaming when it launched its service back in 2007 and over the subsequent 15 years, it has achieved global scale with 22 million paid subscribers today in more than 190 countries. So Netflix already has massive global scale. The next thing he says is a highly debated point. A lot of people think that Netflix is growth has kind of tapped out there. Total addressable Market has already been addressed.
This is where Bill Ackman and I agree and we differ from a lot of other people here. He says, despite its large scale, Netflix is still in the early stages of capitalizing on the decade-long secular growth. In streaming video and correspondingly. The decline in linear pay-tv current subscribers amount to less than a quarter of today's estimated total addressable Market of 800 to 900 million households. That have either fixed Broadband access or subscribe to pay TV excluding China.
So even without China without Russia Bill Ackman sees potentially 800 to 900 million households. Subscribe to Netflix and again right now. Are at 222. So they are less than a quarter of the way there. And again, that's how I view this company. I think we're in the early Innings a streaming as well. He goes on to actually Define the value proposition of Netflix. So recently we've had a lot of people complain, that Netflix is Raising prices. They complain.
That Netflix is going to start charging for sharing sharing passwords in the u.s. to people outside of your household. There's a lot of people that I think have somewhat valid complaints, but consider the value proposition. You're actually getting with Netflix. He says it Netflix. For his consumers on demand commercial-free bin, jabal content with ubiquitous access
at a price point. That is Approximately 80% less expensive than average pay TV package in the u.s. so it's 80% less expensive than your cable package. A Netflix subscription is one of the lowest cost forms of high-value entertainment with cost per hour of Engagement of about 30 cents. The company is vastly superior value proposition relative to pay TV and other forms of entertainment should drive. Substantial pricing power, and meaningfully increase its penetration across, its
addressable Market over time. So he's basically saying that Netflix still offers incredibly good value, especially compared to cable television. The value proposition is dramatically better and the total addressable Market continues to grow as the internet and connected devices become more ubiquitous. Now, he goes on to explain how well positioned Netflix's in terms of their competition.
We hear about all the competition coming, any Planes by Netflix, might be better position to handle this competition than investors are giving it credit for. He says, Netflix as well position as a dominant market leader, was several advantages, relative to existing Legacy Media and Covenants and large capitalization technology entrance. So the big bad cable companies with Deep Pockets, and these large media companies that are
now going into streaming. They form a competitive challenge for Netflix, but Bill Ackman, doesn't think that that's Doom and Gloom for He thinks that they can handle this challenge. He says, the company has a diverse library of content for everyone. That is replenished at a much faster rate than competitors. It releases 150 to 200 original content episodes per month. 150 to 200 more than the volume release by Prime video Hulu Disney and HBO Max combined Netflix is industry-leading.
Subscriber base has enabled the company to establish a very profitable business while spending more on original content than the competitors. That is Netflix's flywheel in action, as the pay TV, cord-cutting accelerates in mature markets, we believe there will be consumer appetite to subscribe to multiple streaming services at a time in the u.s.
we estimate that. The wallet share released from the declining linear pay TV subscriptions which are priced at approximately eighty dollars per month. Can easily sustain a streaming bundle of 325 streaming services per household, which are typically priced around 10 to 15 dollars per month. Offering a significantly better. Customer experience. So the way that he thinks about
this is pretty simple. Most households have been spending somewhere around 80 dollars per month on their cable TV. So if they get rid of the cable TV and they move over to streaming if they're doing the cord cutting they'll think of it as well. I'm spending $15 a month on Netflix. I can add on Disney Plus for like 8 bucks a month I can add on HBO Max for 15 bucks a month, I can add on Discovery or Warner Media or whatever Showtime right?
I have all these subscriptions. Services and even together, they don't even add up to 80 bucks. I'm still saving money. And the Assumption here is I think a safe assumption is that among the three to five streaming services? The average household will have Netflix is probably going to be one of them. It'll probably be one of the streaming services you continue to have. So this is just part of his thoughts on Netflix.
So of course Bill Ackman doesn't just look at PE ratios, he doesn't just look at the free cash flow. You does in-depth analysis on every company that invests in and that's something that I've been trying to promote the people for a long time. You're buying a company with a business model and products and employees and Leadership. You're not just buying charts and graphs, right?
You can look at the charts and graphs but you have to plug it into the company and when you put those together that makes it. So you can form a well-rounded story. You actually have an entire investment thesis there. So this is what Bill Ackman is doing. He has all the numbers, he has all the qualitative research, he puts that together to create an investment thesis. Along with Netflix, he goes on to show some of the unique qualities of this company.
He goes on to say that Netflix has the lowest churn rate by a wide margin among streaming services. That means people don't cancel Netflix all that often. They cancel other streaming services, much more frequently, highlighting its core position as an anchor, a utility like service of any streaming bundle. Netflix is retention in the u.s. its most competitive market. Has remained consistently stable at an industry high levels, despite the launch of Of several
new competitors. And this is what management of Netflix has been trying to highlight look, we have tons of competitors now and people aren't canceling Netflix here. That is a very positive thing. They're not signing up quite as fast in the rest of the world, but the churn rate remains very
low in the u.s. Now, the international markets are the earlier stage growth markets where Netflix has an even more formidable first mover advantage and a significant competitive position in local language content, only Netflix has unique and proven track. Record of elevating Regional Productions, like squid game, Casa de papel Lupin to a global cultural Zeitgeist. So they're the only ones that
have been able to do that. So far, other companies, like, Disney can really only Market what they make in the u.s. to the rest of the world. But Netflix is creating things outside of the US and marketing, it all over the place. And that is something that has so far been unique to Netflix, as Netflix is business, has achieved scale its operating profit margins. Have increased from 4%.
Point four percent in 2016 to 21% in 2021, over the last five years, Netflix has held content spend per subscriber constant. Despite growing overall content spend by 23% per annuum. So they have spent twenty three percent per year, more on content at the same time. The company has increased prices by 7%, annually, resulting in a dramatically improved, subscriber unit economic. So a lot of people are upset by these seven percent. Increases but they are getting a
23% increase in content spend. So the proposition actually improves, he says, from the customers perspective, Netflix is value proposition has become better each year as the growth in the volume of new high-quality content has comfortably exceeded price increases. We believe that the combination of continued subscriber growth.
And pricing power will allow the company to leverage its growing content, spend over an even larger future subscriber base, which will drive Anshel future margin expansion and provide better value. Proposition to its subscribers each year. That's a continuation of the flywheel that we've talked about. And this is where he finishes up on Netflix. He highlights the price coming down while every fundamental of
Netflix is basically improving. He says the opportunity to acquire Netflix at an attractive. Valuation emerged as investor concerns over Management's, short-term guidance exacerbated by recent Market volatility. It led to substantial declines in the company's share price. A 47% increase in Revenue. Approximately eight hundred basis points in margin expansion and a vastly improved free cash flow profile over the last two years as of March twenty.
Second twenty twenty-two Netflix is share prices down approximately 45%. So all these fundamentals improve dramatically but Netflix is stock price Falls 45% from its recent highs and its trading below. Its February twenty twenty P, pandemic, share price, that's pretty incredible. And I think Think that's, of course why he jumped in, although we expect some near-term variability, in the company's quarterly growth and
profitability. We are confident in Netflix's long-term Outlook over the next decade we estimate. The company can achieve double-digit, annual revenue, growth significantly expanding its operating profit margins and grow. Its earnings per share by more than 20% per year. 20 % EPS growth for over 10 years. Moreover, the company is now cash flow positive which over
time will enable capital. Turn through share BuyBacks, he loves the share Buybacks. In the coming years, we believe Netflix is current valuation represents. A meaningful discount to intrinsic value for a business of its quality and exceptional growth potential. So that is Bill ackman's, commentary on Netflix and I think that fits very well with the Bill Ackman checklist. He looks for brand value pricing power.
He looks for margin expansion, a company that will eventually become very free, cash flow positive and do Buybacks in the coming years. He looks for good leadership. If you look for a company with a wide moat that can fend off competitors, he highlighted qualitatively, all of those things in this description. So, of course, Bill Ackman, looks at both the numbers and he looks at the qualities of the company and I think that Netflix does make sense in his
portfolio. Now, the next one that I'll highlight is Canadian Pacific Railway. This is a brand new investment in Bill ackman's portfolio. And at first, I really didn't know how this one fit in. I was a little bit confused by it. I thought maybe this is like a Commodities play. He's investing in companies. Like Netflix and Domino's and then a railway seemed quite random, but it does highlight in one of the paragraphs here. I think the core reason why he's
investing in this company. He says Canadian Pacific has been the fastest growing North American class. One railroad with an average organic growth rate of 6 percent over the last five years in December Canadian. Pacific closed the acquisition of Kansas City Southern which we believe will be a transformation on value-creating transaction. I think this is the primary reason the Acquisition of KCs positions Canadian Pacific to be the only North American rail,
right. Railroad with a direct route from Canada to Mexico and it will result in significant revenue and cost. Synergies KCs is rail network is at the center of the North American rail system. Linking Mexico to Major markets in the midwest. The southeast regions of the United States, the see pkcs combination will connect six of the seven largest metro regions in North America, in Direct route and offer unparalleled speed and service for customers Canadian Pacific.
Currently owns KCs through a voting trust which entitles Canadian Pacific to full economic ownership of the company but does not permit Canadian Pacific to take operational control of the railroad until it receives regulatory, approval of which pending merger application. We expect this approval to occur by the end of the year. I think this is the big reason he sees this acquisition.
Position as having all sorts of synergies, and he thinks that this will create a better value proposition. So I think that this event is why he decided to jump back into it, but it does highlight one other thing. And this is another thing that I tried to highlight that Bill Ackman, always, does he buys companies when they trade down below their historical valuation. He says Canadian Pacific's years have recently traded at a discounted valuation relative to history and its peers.
When companies become Discounted relative to their long-term history and their companies that he likes that he thinks has good qualities. That's the time that he typically jumps in on him. So when I looked at this overall, I see it as one, good thing happening to this company that he thinks will have a lot of good. Synergies on top of a company. That is well insulated from lots of competitors and threats because it's a railway, it's
more like a utility company. Plus, it's trading at a discount and all those factors. I think make it attractive for an investment for Bill. Ackman. Now the last one. I want to highlight is another new investment in a company that I'm currently invested in, which is Domino's Bill Ackman, recently purchased Domino's right around here, and it traded up like crazy, right? It went up 50 percent, then it traded right back down.
And since it traded down so much, I had this company on my radar for a while, I wanted in on it. And now it's traded down to just around like eight ten percent from his buy-in. And I decided to take the jump into this company with my passive income. Portfolio. So that's a dividend portfolio. Domino's fits really well into that portfolio. But that's kind of the story with dominoes so far with Bill Ackman. He says, that our investment in
dominoes was off to a strong. Start with shares up, over 50% from when we made our investment, in March, through the end of 2021 driven by robust, operating results. And a late year Omicron driven rally at the stay-at-home stocks most of these gains disappeared in the first few months of this year with Domino stock price declining 29. Percent through the end of March, 22nd. In addition to the broad Market sell-off especially in higher
growth companies. We believe that their recent stock price weakness is attributable to an ongoing slowdown in same store sales growth that begin in. The third quarter of 2021, Domino's has a long history of defying the Skeptics and outperforming following brief periods of weakness and we believe that this time is no different. So the big problem with Domino's was slowing same store sales growth. That's what investors became concerned about.
He says, the recent deceleration is driven primarily by driver shortages due to the current state of the US Labor Market, which is acutely, impacting the delivery business, that comprises two thirds of sales. While driver shortages have led to shorten hours and customer service challenges at many
locations. The company is taking corrective action by conducting a full assessment of the driver labor market, launching new hiring and Training Systems and eliminating time-consuming in-store tasks So basically, Domino's is on top of this, they know that driver shortage is a challenge. They're taking all sorts of action to fix this. He says it in light of high inflation and labor food costs Domino's. Recently.
Refresh its core mix-and-match delivery offers by raising the price point from 599 2699 and adding new products to the offer. Now he says, we estimate that this one dollar increase will be a several percentage Point, Tailwind to same store sales growth.
So just increasing these items from 89 2699, when you're selling this, much stuff will increase the same store, sales growth, by several percentage points, without taking into account, any positive benefit to ticket that Domino's has historically seen from new product additions. This is the first time, the company has ever increased the prices on this offering and over 12 years.
And we continue to believe that Domino's customer value proposition remains exceptional product Innovation and peak level of advertising funds and the return of key promotion. Should provide additional Tailwinds to sales growth. So Bill Ackman believes that Domino's traded down in price because same store sales slow down but he thinks it will be
very short-lived. He thinks that Domino's is going to re-accelerate, same store sales, right back to where they've been for the past 12 years, and this will be a short-lived blip again. This is another point where I agree with them. I think it's a great company. That's attractively valued. He says, Domino's, currently trades at a mid 20s, multiple of four turnings a compelling valuation, given its leading position. Ian in the quick service restaurant.
Pizza category enabled by its own Crown Jewel. That delivery infrastructure. That is something that really no other company. I know of no other quick service restaurant has quite like dominoes the high certainty nature of the business and its mid to high-teens long term earnings growth. We are pleased that the company is taking advantage of its depressed share price by continuing to repurchase shares consistent with its long-standing policy of returning excess cash to
shareholders. And of course that's something that Domino's They do massive amount of share BuyBacks. So as the price Falls, you know, dominoes themselves is a big buyer of the company so that's all I'm going to highlight from this letter but I think that paints a more well-rounded picture. So you have part 1 of how Bill Ackman. Pick stocks, the fundamentals, the share BuyBacks, the dividends it trading below, historical valuation, but this gives you a view of more of the
qualitative aspects. He really does deep dive Research into every single company so that he understands the business inside and out and I think that's what you have to do. If you're Investing large amounts into individual companies. You need to know what you own. So I'm going to be following Bill Ackman. I'll continue to look at his portfolio as well as many other great investors and you learn about more of that hair. So, I hope you enjoy it. I'll see you in the next one.