Hedge fund managers are generally considered the cream of the crop on Wall Street. Their success is driven by an uncanny ability to see patterns across large volumes of data and stay ahead of the market. To err may be human, but the best fund manager needs must rise above mere mortals – at least that’s how they make their billions.
William A. Ackman, Harvard Business School alumnus, and founder and CEO of Pershing Square Capital Management LP, was one such case. We say was, because even though Ackman made a killing from accurately predicting the Housing Bubble of 2008, he lately seems to have lost his game. The past few months have seen him proven wrong on more than one major count, and his successive bad calls seem to be heralding a fall from grace.
Consider that on December 20, 2012, after conducting what he said was “extensive research”, Ackman rained fire and brimstone on Herbalife Ltd. (HLF) during a presentation in an investor conference, claiming that the company was a pyramid scheme that would see its valuation shrink to $0. He rounded off his doomsday predictions by announcing that his company had shorted $1 billion worth of Herbalife stock.
Nobody took his argument seriously, and for good reason.
As the stock climbed over the following months, Ackman was forced to write a letter to investors on October 2, 2013, in which he said that: “In recent weeks we [Pershing Square] have restructured the position by reducing our short equity position by more than 40% and replacing it with long-term derivatives, principally over-the-counter put options.”
But investors were still not buying into the pessimism. Then, perhaps having finally realized just how firmly he had jammed his foot in his mouth with predictions of Herbalife’s impending doom, Ackman tweeted on October 7: “If you people don’t repeal your $HLF purchases, I’ll use my incredible powers to furlough Wall Street. #FairWarning”
The final nail in the coffin of Ackman’s credibility was mercilessly hammered in by Herbalife’s third quarter (3Q) earnings announcement on October 28. Results were even better than market expectations, with a 13% increase in worldwide volumes and $1.2 billion generated in net sales during the quarter. The company’s 3Q adjusted earnings were up 44% year-over-year to $1.41 per share, and the company’s guidance for fiscal year 2014 expects per share earnings to clock in the range of $5.45-5.65.
And this was not even the first time Ackman has been so wrong about a company. He was actively involved in the retail store business with his investments in J.C. Penney Company, Inc. (JCP) and The Procter & Gamble Company (PG). J.C. Penney has been hemorrhaging money for more than a year, but it took Ackman till August 2013 to finally abandon his 18% stake in the company. P&G, meanwhile, has been switching CEOs since 2009 in hopes of a turnaround. In the past, Ackman was also deeply invested in Borders, a book and music retailer. The company filed for bankruptcy in 2011.
If anything, Ackman’s track record should tell a smart investor one thing – if he’s betting on a company’s failure, buy the stock. If he’s bullish, sell.
*Pershing Square’s gross return, year to date, has been only 1.8% – compared to the S&P 500’s 19.8% return over the same period.
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