Billionaire Bill Ackman may or may not like to eat out. But he certainly seems to like investing in companies that profit from others eating out. His Pershing Square Capital Management hedge fund only owns nine stocks -- and two are in the restaurant industry.
Of these two restaurant stocks, Ackman has a bigger position in Chipotle Mexican Grill (NYSE: CMG) , which conducted a massive 50-for-1 stock split after the market closed on June 25. However, he isn't as heavily invested in Chipotle now as he was earlier this year. Ackman sold this stock-split stock hand over fist in the second quarter of 2024.
Ackman chips away at his Chipotle stake
The billionaire slashed Pershing Square's stake in Chipotle by 22.5% in Q2. Even after selling 8.38 million shares, though, Chipotle is the second-largest holding in his hedge fund's portfolio.
Ackman first bought Chipotle shares in the third quarter of 2016. He increased Pershing Square's position by more than fivefold in the following quarter. However, Ackman has sold a lot more of the stock than he's bought since then, including sales in five of the last six quarters.
Chipotle has been a big winner for the hedge fund manager through the years, skyrocketing more than 520% since the end of the third quarter of 2016.
Why did Ackman sell such a large portion of Pershing Square's stake in Chipotle in Q2? Perhaps he wanted to take some profits off the table. He hasn't soured on the overall restaurant industry, though. In Q2, Ackman increased his hedge fund's position in Restaurant Brands International , which operates Burger King, Firehouse Subs, Popeyes, Tim Hortons, and other restaurant chains.
Chipotle's roller-coaster ride
Ackman's latest reduction in Pershing Square's stake in Chipotle came at a good time. The stock rose as much as 50% in the first half of the year but began a slide of over 20% in late June.
The big gains earlier in 2024 were driven primarily by Chipotle's strong quarterly earnings growth. In February, the company reported that full-year 2023 earnings per share (EPS) soared 38% year over year, with 2023 Q3 EPS up more than 27%. In April, Chipotle announced that 2024 Q1 EPS increased nearly 24% year over year, with adjusted EPS jumping more than 27%.
Excitement about the company's 50-for-1 stock split also probably contributed to Chipotle's impressive performance in the first half of 2024. This stock split ranked among the largest ever conducted in New York Stock Exchange history.
What caused Chipotle's stock to fall? Some of the decline was likely due to the overall market pullback in recent months. However, the major culprit was the unexpected departure of CEO Brian Niccol . On Aug. 13, 2024, Chipotle announced that Niccol was leaving to become chairman and CEO of Starbucks .
Should you sell Chipotle stock, too?
I don't think anyone should sell Chipotle solely because Ackman slashed his hedge fund's stake in the stock. However, there are other reasons to consider selling.
While Chipotle should easily find a new CEO, Niccol leaves big shoes to fill. Some investors believe the adage about betting on the jockey and not the horse applies to investing in stocks, and with Niccol bolting for Starbucks, these investors might want to sell their Chipotle shares.
In my view, though, the main reason to sell Chipotle is valuation. The stock trades at a forward price-to-earnings ratio of nearly 48. Although Chipotle is generating strong earnings growth, I don't think its growth justifies that premium multiple.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool recommends Restaurant Brands International and recommends the following options: short September 2024 $52 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy .
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