Pershing Square Capital Management unloaded about a third of its investment in Canadian Pacific Railway Ltd. – and so far, rail investors seem to like the news: CP shares touched $150 in early trading on Friday, up about $2 and near a record high.
When a smart, plugged-in investor unloads a position in a company, the move often sends up a caution signal for the stock. If the smart investor can't see much upside, why would anyone else?
But Pershing Square, the hedge fund steered by Bill Ackman, is in an unusual position here. First up, Mr. Ackman has scored big with CP. He recognized early on that it was a struggling railway in need of tweaking. He took a massive 14.2 per cent stake in the company, won control, imposed upon it his own management choices, and ultimately tripled the value of his original investment. Taking some profits seems like a natural thing to do, given the outsized position of the stock within his fund.
He had also telegraphed the sale back in June, giving the actual sale less importance.
But what's equally interesting here is that the CP sale follows Mr. Ackman's struggles with at least two other high-profile investments. His big bet on retailer J.C. Penney Co. Inc. didn't pan out, and he withdrew in August after suffering a loss of hundreds of millions of dollars.
He has also run into problems with his bet against Herbalife Ltd. He shorted the stock late last year in a $1-billion (U.S.) investment, profiting if the shares fell – but the shares have been performing remarkable well, rising more than 100 per cent in 2013.
These setbacks have weighed on Pershing Square's results this year. Reuters reported in September that the $11-billion fund is flat in 2013, trailing strong returns by the S&P 500 and many other hedge fund managers, and straying from an average annual return of about 20 per cent over the fund's life.
This poor performance could affect the fund's ability to attract new investors, let along retain existing ones. What does this mean for CP? Pershing Square could be selling part of its stake as part of a plan to invest in bigger, better opportunities elsewhere, in an attempt to salvage its reputation.
In other words, the sale has little to do with CP itself and more to do with the situation at Pershing. Investors aren't following Ackman out the door on this one, and that makes some sense: Following Ackman hasn't been very profitable this year.
David Berman