I see in the Financial Post that Bill Ackman is selling 30% of his stake in CP Rail. See CP Rail. Why is he selling now? Beats me. There could be many reasons. An obvious reason is to take some profits after a huge runup in the stock.
If my memory has not deserted me this whole CP/Ackman adventure began in mid 2011. Here is the latest chart of CP Rail. I will also include CN Rail just for reference.
Since late 2011 CP has advanced from the $50's to over $120 per share. That looks like over a 100% gain (dividends excluded) over 1 1/2 year period to me. Ackman claims he tripled his money so there appears to be a discrepancy there. In any case it is a very nice return. From the stock price movement I would conclude Ackman, Harrison and the CP team deserve a great deal of credit here. Keep in mind the market and CN Rail have also done quite well. CN is up about 55% over the same time period. Currently CP has a high P/E (over 40) but does have a strong earnings forecast into 2014. My source GlobeInvestor Gold) has an EPS at $7.86 for 2014. Thus, the forward P/E is about 16. In the most recent quarter the company reported excellent results at $1.24 per share. Revenues were up about 9%. The operating ratio dropped to 75.8%.
What are the long term propects? Obviously, I don't know for sure but I do NOT see a natural competetive advantage for CP - in fact maybe the reverse in true (based on the rail routing). Over the long haul I see mean reversion between the two companies. I realize that's not a difficult call to make. Right now CP (and CN) are doing well due to the shipment of oil by rail car from the Bakken oil field in North Dakota and the oil sands in Alberta.
A couple of days ago RBC downgraded CP based mainly on valuation metrics. On the other hand I just read a piece that JP Morgan forecasts $12.50 per share in 2016 and a $200 share price - that seems optimistic to me. At some point we will have a recession. I cannot prove it but it looks like there is a lot of hot money in this stock (momentum players). That worries me and I stay away.
Has Pershing the hedge fund and Harrison added value? After a couple of years I think the answer is clearly yes. Many established Canadian companies have a disease which I refer to as CountryClubitis - this is a malady that seems to affect the most established of blue chip companies (and government). Ackman and Harrison broke the pattern and brought value to the shareholders.
BTW, Ackman in recent years has had some mis-adventures in JC Penny and Herbalife. I don't know much about those investments other than he did not do well (so far). The CP play should ease the pain.
The whole thing with CP/Ackman started me thinking about hedge funds in general and their performance and so on. When I first started getting involved in the markets in the mid 80's hedge funds were viewed as high risk speculative investments. They were mainly an investment vehicle for the wealthy who could afford the fees and also afford the potential losses. (BTW, if you need a backgrounder in hedge funds please see this article Hedge Funds: Past, Present and Future here. or for a more basic explanation see the web site Investopedia here) Nowadays they seem to have evolved to be an "alternative" investment. Even pension funds are investing in hedge funds.
I find the whole hedge fund issue an interesting area of investigation. Do hedge funds outperform the market? Do they have an intrinsic advantage over other market participants? Are hedge funds worth the high fees they charge? Does their collective actions threaten the economy as a whole? Maybe in a future post I might look at these issues.
Disclosure: I have no position in CP or CN (or Pershing Square)
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