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Pandemic favours the big, says Wall Street legend Bill Ackman

Wall Street legend Bill Ackman says megacap stocks such as Starbucks will come out of COVID-19 with a bigger moat and a market dominance like never before, and no election outcome will make a difference to the plight of wrecked small businesses.
Jonathan Shapiro and Vesna Poljak
Oct 25, 2020

Wall Street legend Bill Ackman says megacap stocks such as Starbucks will come out of COVID-19 with a bigger moat and a market dominance like never before, and no election outcome will make a difference to the plight of wrecked small businesses.

He's unconvinced that the US election will be the clean sweep markets are hoping for and warns of a hard time over the next two weeks that could trigger another rout if postal votes delay the declaration of an outright winner.

“What the stock market doesn't reflect is the plight of the small business owner. It reflects the plight of the well capitalised, large-cap dominant companies that comprise the S&P 500 and the Dow Jones," Mr Ackman said.

“Think about a company like Starbucks. There are a lot fewer coffee shops that will be competing with them.”

Mr Ackman's $US11.5 billion ($16 billion) Pershing Square Capital Management is known for its concentrated portfolio of stocks and activist style, and bought back into Starbucks after the early market drawdown.

He was interviewed ahead of his appearance at the Sohn Hearts & Minds Investment Leaders conference next month.

Mr Ackman famously warned that hell was coming in March as the COVID-19 crisis escalated, forcing lockdowns around the world. He is thought to have made $US2.6 billion ($3.6 billion) in a complex credit trade that profited as credit markets tanked.

The high active case counts in the US are because there wasn't a coordinated lockdown strategy. He thinks good progress has been made since.

“This is really the private sector in coordination with the [US Food and Drug Administration], and with the government," he said. "The federal government has done a very good job in accelerating the development of therapeutics and vaccines.”

With the presidential election looming, Mr Ackman said markets were more concerned about a smooth transition than the result, and warned that uncertainty around the outcome, such as a delay in calling the winner as postal votes were counted, would not be welcome.

“The biggest risk to the markets is not whether Trump or Biden is president.

"It's just making sure there's a smooth transition, either to the second Trump administration or to the first Biden administration. Hopefully, we don’t have more civil unrest, more uncertainty, more divisiveness."

He said there was a desire for calm and that the days heading into the election would be "a hard time".

"I don’t know that we are going to have certainty around the election, I think it's unlikely we will have it by midnight on November the 3rd.

“There's been more mail-in ballots than ever before. Will we have one victor on November 3 and a different victor based on the mail count? That is a fairly disastrous outcome.”

Shadow of tech stocks

There's no argument that the COVID-19 pandemic has tilted the balance in favour of bigger and more powerful companies. The crisis has also justified the comparatively lower valuations ascribed to old economy stocks and the higher valuations of tech stocks.

"The premium that people have paid for quality businesses has clearly proven to be deserved," Mr Ackman said.

But there are signs of excess in the market, such as the curious pattern of shares in bankrupt companies trading at higher levels than before they failed, and “enormous” valuations” on the fast-growing tech stocks.

“A lot of really good things have to continue to happen for a very long period of time" to justify those valuations on high growth tech stocks. "That is a risk factor.”

Investor speculation is being driven by low interest rates, forcing investors to take bigger risks and place higher valuations on estimated future revenues and profits.

At some point that could change. “With all the debt that has been issued globally, you could see higher interest rates. Higher rates would, I think, likely reduce valuations.”

Mr Ackman also expressed his governance concerns as passive index-tracking funds accounted for larger shares of company ownership. A reversal of those inflows could also weigh on stock price performance.

“Right now index funds are buying every day because they’re getting inflows. What happens when they sell every day because they’re getting outflows?”

However, those fears haven’t discouraged Mr Ackman from stepping into the market.

“We're fully invested, owning what we think of as great businesses at good prices, so maybe I'm complaining about everyone else's stocks but ours are fine."

SPAC speculation

While Mr Ackman was participating in an interview with Australian journalists, The New York Post speculated that he was teaming up with former New York City mayor Michael Bloomberg to partially float his eponymous financial data company through Pershing's special purpose acquisition company, or SPAC.

Mr Ackman declined to comment, according to The Post's reporting.

Earlier this year, Mr Ackman raised $US4 billion via the SPAC (Pershing Square Tontine Holdings) but has yet to reveal what business the company will be backing. SPACs are common in the US: an investor lists a so-called blank cheque company, retaining a portion of equity, and has a certain time frame to purchase an asset.

“As SPACs become more investor-aligned as the frictional costs go down, as the fees go down, they'll become a very good alternative to IPOs. It's a healthy thing for the markets," Mr Ackman said.

He has a concentrated portfolio and seeks to own “super durable growth companies” that are not exposed to regulatory changes. He’s also trying to own businesses that can withstand the potential value destruction of disruption, which is as powerful as ever.

“We're in a world in which a couple of 17-year-old entrepreneurs can start a company in the garage," he said. “They have access to an enormous amount of venture capital, unlimited high-speed bandwidth and processing power,” he continued.

“They can recruit talent with stock options, and they're looking to disrupt every business of scale.

"And so the question: ‘Does the business have a sustainable strategy?’ And that's really what we're looking for.”

This article was originally posted on The Australian Financial Review here.

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