The popular hedge fund manager looks for a clear set of criteria when seeking out investment candidates.
Valuation concerns probably pushed Ackman and his firm to sell some shares last year.
Macro headwinds are negatively impacting this business, but investors should focus on the long term.
Bill Ackman is a well-known investor whose strategy centers on making concentrated bets in what he believes are high-quality businesses. The hedge fund he runs, Pershing Square Capital Management, has a solid track record over the past two decades. Everyday investors watch the firm's moves closely.
In the portfolio as of Dec. 31, there were 11 total positions. One of them is for a company whose shares Ackman has been selling over the past several quarters. Nonetheless, it still represented 12% of the Pershing Square fund as of year-end, making it the third-largest holding.
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Shares have tanked 17% in 2025 (as of April 25). But in the past five years, they have soared 183%. Is it time for investors to buy this top Bill Ackman stock on the dip?
Checking the boxes
Pershing Square and Ackman have a clear investment philosophy with critical factors that they look to identify in ideal portfolio candidates. It's clear that Chipotle Mexican Grill(NYSE: CMG) passed the test.
One trait is that the company in question must generate positive free cash flow (FCF) on a consistent basis. This is the money left over after reinvesting in growth initiatives. Chipotle doesn't struggle in this regard. Between 2021 and 2024, the business reported $3.6 billion in cumulative FCF, which the leadership team partly used to buy back outstanding shares.
This relates to another trait Pershing Square seeks, which is a strong balance sheet. As of Dec. 31, Chipotle had substantially more in current assets than current liabilities. And it carried no debt on the books. So while many companies pay an interest expense, Chipotle actually earns interest income that boosts the bottom line.
Ackman also looks for high barriers to entry. The industry is incredibly competitive. And a valid argument can be made that there are low barriers to entry, as new restaurants seem to be popping up all the time.
But I think the hedge fund manager is alluding to the extreme difficulty any new industry entrant would have to get even remotely close to the success Chipotle has achieved. In other words, building a powerful restaurant brand with significant scale is an almost impossible task.
Never on sale
It makes sense that Ackman sold a sizable chunk of the Chipotle stake, almost 17 million shares to be exact, throughout 2024. To be clear, it probably had nothing to do with the quality of the company. Chipotle continued to fire on all cylinders last year.
The stock sale almost undoubtedly had to do with the valuation. In 2024, shares traded at an average forward price-to-earnings (P/E) ratio of 51.2. This is certainly expensive, and it provided Pershing Square a great opportunity to exit with substantial profits on its investment.
However, the hedge fund still held a meaningful position in the Tex-Mex chain at year-end, so it must still be bullish on the company. And now that the stock is down 17% in 2025 and 27% below its all-time high, perhaps it's time for individual investors to get on board.
It's worth mentioning that Chipotle's momentum has hit a speed bump. Same-store sales declined 0.4% in Q1, driven by weaker consumer spending in the current economy. The leadership team is still very optimistic about the company's position in the industry and its long-term potential. But there could be some more trouble in the near term.
I've never hesitated to highlight just how great of a business Chipotle is. Its financial performance over an extended time period proves this perspective. But I could just never recommend the stock as a buy due to the valuation.
As of this writing, the stock trades at a more reasonable forward P/E ratio of 41.3. I think investors should seriously consider dollar-cost averaging into Chipotle shares over the next several months.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short June 2025 $55 calls on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.
