When Bill Ackman speaks, it can pay to listen. Ackman has achieved tremendous success over the years with his Pershing Square Capital Management hedge fund. His personal net worth currently stands at close to $3.6 billion.
Ackman did quite a bit of speaking at the CNBC Delivering Alpha conference last week. During his conversation with CNBC's Scott Wapner, the billionaire investor revealed the kinds of stocks he thinks should perform well in today's market.
Ackman's key criterion
You might view Ackman as a bear after hearing some of his comments at the CNBC conference. He expressed concerns about the size of the U.S. national debt and believes that inflation "is going to be persistently higher." But when Wapner asked if he was negative about the stock market, Ackman immediately replied with an emphatic "no."
The hedge fund manager acknowledged that most businesses would have a hard time navigating a world with inflation at 8% or so. However, the sky-high level of inflation has now fallen to closer to 3%. Ackman stated, "[M]any businesses can do very well in a world of 3% inflation."
His key criterion for investors is to own the stocks of "businesses that have pricing power." These businesses can increase the prices of their products and services without losing many, if any, customers.
Ackman predicts that inflation will remain higher going forward than it has been throughout much of the period since the financial crisis of 2008 and 2009. However, businesses that have pricing power should be able to handle this dynamic relatively easily.
Stocks Ackman thinks fit the bill
Does Ackman have any particular stocks in mind that have pricing power? Yes. He told Wapner that the kind of stocks that Pershing Square owns can actually view inflation as "their friend." As long as they can grow revenue faster than costs, they'll perform well.
Unlike many hedge funds, Pershing Square only holds positions in a handful of stocks. As of June 30, the total stood at eight -- and two of them were different classes of shares of the same company -- Google parent Alphabet(NASDAQ: GOOG)(NASDAQ: GOOGL).
Ackman highlighted Google in his interview at the Delivering Alpha conference. He spoke at length about how the company is likely to dominate artificial intelligence (AI) for years to come. The billionaire investor also compared Google and several other Pershing Square holdings to royalties. He said that Google basically enjoys a royalty on web advertising.
Pershing Square now has a stake in Universal Music Group(OTC: UMGN.F) that wasn't included in its second-quarter holdings. Universal owns a broad catalog of songs. Ackman argued that the company "is a royalty on listening to music." He added, "If there's music playing out there, Universal is getting a fraction of a penny for every song, you know, that's being streamed."
Ackman also mentioned Restaurant Brands(OTC: RSTR.F) and Hilton(NYSE: HLT), both of which are in Pershing Square's portfolio. Restaurant Brands operates the restaurant chains Burger King, Firehouse Subs, Popeyes, and Tim Hortons. He told Wapner that there's "a royalty on people eating at Burger King" or any of Restaurant Brands' other restaurants. The hedge fund manager proclaimed that Hilton is a "royalty on people staying in hotels and eating and drinking and going to events."
This royalty analogy ultimately translates to pricing power. Ackman said that he "feel[s] comfortable owning these kinds of businesses, even if inflation remains high."
Ackman is 100% right
I think that Ackman was 100% right in his comments about the stocks that should perform well in today's market. I definitely agree that inflation is likely to remain higher than it's been over the past several years, although not at the scary levels we saw in 2022. Ackman is also spot on in identifying pricing power as a critical criterion for investors to evaluate in buying stocks right now.
As for the specific stocks he brought up during the CNBC interview, I suspect that all of them could deliver growth even with moderately higher inflation levels. My favorite of Pershing Square's holdings is Alphabet. In addition to the pricing power that Ackman correctly noted the company has, the tech giant should also have tremendous growth prospects with the AI boom.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Keith Speights has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet and Universal Music Group. The Motley Fool has a disclosure policy.