Last month we looked at 13F filings. These are the quarterly portfolio disclosures, required by the SEC, of large investors - those managing $100 million or more.
And we discussed 13D filings. These are required when a big investor takes a controlling stake in a company (ownership of 5% or more of the outstanding stock), he/she is required to disclose it to the SEC, through a public filing within ten days over crossing the 5% threshold. If it's a passive investment, they file a form 13G. If they intend to engage management (i.e. wield influence) they file a 13D.
Bill Ackman, the well known billionaire activist investor, filed a 13D on Chipotle (CMG) yesterday. Today, we'll take a look at this move.
In this filing, his fund, Pershing Square, disclosed a 9.9% stake in the company. Ackman thinks the stock is "undervalued" and "an attractive investment."
Chipotle, at its peak valuation last year, was valued more like a high-flying tech company. Yet this was a restaurant, albeit an innovator in the fast food business - in fact, they created a new segment in the food business, "fast casual."
Then came the food crisis- an outbreak of e-coli cases. And the stock has been crushed - cut in half over the past year. Customers have been walking from Chipotle and into the many fast casual alternatives (competition spawned from Chipotle’s innovation).
Who tends to buy the bottom in these situations? Activists.
What’s a quick and easy fix in a sentiment crisis? Change.
To be sure, Chipotle has been drowning in a sentiment crisis. And even though Ackman thinks the company has "visionary leadership" we'll see if he makes someone in current leadership a sacrificial lamb, in order to repair sentiment in the stock. This power to influence change is one of the few remaining edges in public stock market investing.
Ackman has said in a past letter to investors, "minority stakes in high quality businesses can be purchased in the public markets at a discount," arising from two factors: "shareholder disaffection with management, and the short term nature of large amounts of retails and institutional investor capital which can overreact to negative short-term corporate or macro factors." That’s how you identify value. But how do you close the value gap?
Shareholder disaffection with management is a typical qualifier to make it onto the radar screens of activist investors. There's an opportunity to shake up management, change sentiment, and unlock value.
Last month, we talked about Mick McGuire, a protégé of Bill Ackman. He filed a 13D on Buffalo Wild Wings (BWLD), and announced a plan for change, and publicly said the stock could double on his game plan -- it put a bottom in the stock.
Chipotle is up 5% on the news of Ackman's involvement. At 42% off of highs, it's a low risk/ high reward bet to follow Ackman.
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