There has been no respite for markets since Fed Chairman Jerome Powell took the stage in Jackson Hole and suggested the central bank will do whatever it takes to tame inflation and if more rate hikes are required – so be it.
The market may have gotten a case of the heebee jeebees in response, but it’s a plan that billionaire hedge fund manager Bill Ackman believes will work. By next year, the CEO and founder of Pershing Square Capital expects inflation to be at least halved.
In the meantime, Ackman offers some tried-and-true advice for those wondering how to deal with bad conditions. “We think that at the end of the day, if you have great businesses, you can get through a tough time like this,” Ackman explained. “Our biggest fear was inflation, and that’s why I wanted the Fed to raise rates quickly and soon.”
So, let’s dig into the details of two stocks that make up a large chunk of Pershing’s $7.46 billion portfolio. Obviously, Ackman considers these stocks quality, but he’s not the only one showing confidence in these names. According to the TipRanks database, Wall Street analysts rate both as Strong Buys.
Howard Hughes Corporation (HHC)
We’ll start with real estate company The Howard Hughes Corporation, a master-planned communities (MPC) developer. HHC manages every part of the community, from strategic development to the management of matching commercial assets. It does this by operating through three main business areas: MPC, Strategic Developments and Operational Assets. Using a synergistic strategy, HHC is able to control the cash flow of the entire business, which ultimately fosters a stable cycle of value creation.
It’s a business strategy that seems to be working, even in the face of difficult macroeconomic conditions. Despite the economic downturn, rising inflation and fears of a recession, the company delivered a strong second-quarter report.
Second quarter net income came in at $21.6 million, translating to $0.42 per diluted share versus net income of $4.8 million – $0.09 per diluted share – in the same quarter last year. The figure also easily beat the loss of 39 cents per share expected by analysts. The premium price also improved expectations. Revenue rose ~30% year-over-year to $276.71 million, coming in some way above the $203.7 million analysts were predicting.
It’s the kind of performance that will no doubt please Ackman, whose Pershing fund owns 26.5% of HHC. He currently owns 13,620,164 shares, worth 862.56 million at the current share price.
Also decidedly bullish is BMO analyst John Kim, who finds plenty of reasons to support the real estate company, while also noting that the stock’s 2022 performance (down 38%) is not indicative of the company’s prospects.
“HHC offers investors a unique entry into the real estate market as the largest public Master Planned Community (MPC) developer and operator in top US MSAs, HHC stands to benefit from attractive fundamentals due to a favorable housing supply/demand imbalance that should continue to support house prices,” noted Kim.
“We believe the year-to-date underperformance is disproportionately correlated with homebuilder performance as HHC benefits from recurring NOI (net operating income) through its commercial assets and cash flow from condo sales, and as hence its current market price creates an attractive risk. reward profile for investors,” the analyst added.
Accordingly, Kim rates HHC as Outperform (ie, Buy), while the $90 price target leaves room for 12-month upside for the stock of ~42%. (To follow Kim’s history, Click here)
Along with Ackman and Kim in the bull camp, all 3 other recent reviews of the Street are positive, making the consensus view here a strong buy. The forecast calls for one-year gains of ~52%, considering the average target is at $96. (See HHC Stock Prediction on TipRanks)
by Lowe (LOW)
Next we have renowned home improvement specialist Lowe’s. What began as a single hardware store in North Carolina in 1921 has grown into one of the largest home improvement retailers in the world – in fact, second only to Home Depot, both domestically and globally. At the start of the year, the company had 1,971 home improvement and hardware stores under its umbrella. Lowe’s projects itself as well-positioned to continue to take a share of the $900 billion home improvement sector.
In addition to the current usual array of macroeconomic concerns– rising inflation and potential for recession – influencing consumer behavior, Lowe’s business has been affected by the changing priorities of the post-pandemic era. After demand soared during the pandemic as consumers used stay-at-home orders to cover their homes, more money is now being spent on activities outside the home. Therefore, the short-term demand for DIY products in some segments has decreased.
This was seen in the company’s latest quarterly report – for 2Q22. Revenue fell 0.3% year over year to $27.48 billion, missing Street expectations by $680 million. That said, the company manages its profitability profile well. EPS rose 9.8% year over year to $4.67, topping the $4.58 analysts were expecting.
Ackman remains long and strong and made no changes to his position during the quarter. Pershing owns 10,207,306 shares worth ~$1.97B right now, which is almost 24% of its capital portfolio.
Scanning the Q2 print, Truist analyst Scot Ciccarelli isn’t worried about slowing DIY sales and thinks the business is in a good position.
“We believe that 2Q12 (and all 1H2022 DIY sales) were heavily impacted by difficult comparisons and this year’s shortened Spring period, resulting in the company expecting the low end of the comparison guide +/ -1% for the year,” explained the 5-star analyst. “However, through productivity initiatives, EBIT margins actually increased despite the top-line deficit, and earnings are expected to reach the high end of their forecast of $13.10 to $13.60.”
“Overall, we believe trends remain solid, DIY sales are beginning to be positively impacted, profitability remains well under control, and we believe the stock can continue to appreciate higher in late ’22/early ’23 if trends persist as we wait,” Ciccarelli summed up.
To that end, Ciccarelli has a Buy rating on shares of LOW, supported by a price target of $263. The implications for investors? Potential upside of 34% from current levels. (To follow Ciccarelli’s history, Click here)
Looking at the consensus analysis, with 15 buys outperforming 5 holds, the stock claims a strong buy consensus. The average price target stands at $241.35, indicating the shares have room for 23% growth over the next year. (See LOW stock prediction on TipRanks)
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Disclaimer: The views expressed in this article are solely those of the featured analystsmall. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.