Bill Ackman Is Right on the Money. Investors Are Ignoring Quality for “New New” Stocks

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It’s been a month since Pershing Square USA (NYSE:PSUS) and Pershing Square (NYSE:PS), the new plays led by star hedge fund manager Bill Ackman, went live on the public markets. The reception has been far more positive for the latter than the former.

And while it’s more exciting to own a piece of the company behind the portfolio with Pershing Square, I do think that the discount on net asset value (NAV) makes the former investment more than worth a second look, especially for investors who believe in Mr. Ackman’s ability to generate meaningful alpha in a market environment where extreme momentum and overvaluation can co-exist with big-time bargains hiding in plain sight.

With Mr. Ackman recently sharing his beliefs in an episode of the “All-In” podcast, the man shone a light on the current market behavior where investors seem to be overlooking the boring, but very high-quality companies, which also happen to be quite cheap, for the “new new” kinds of stocks.

Indeed, Space Exploration Technologies (NASDAQ:SPCX) is the newest of the new, and the stock has been skyrocketing out of the gate, minting day-one buyers with a fairly quick gain, as shares went on to gain close to 20% on the first full day of trading on Monday.

Despite the overvaluation concerns on IPO day and the $2.52 trillion valuation, which bakes in a lot going right, it feels like the appetite to speculate on what’s new and hot is very much in play for the early summer. It’s not all too hard to imagine people ditching Microsoft (NASDAQ:MSFT), a recent big buy for Pershing Square, to raise cash for the SpaceX IPO.

It’s hard to be sidelined when the “new new” thing is in

When it comes to the “new”  factor, it doesn’t quite get better than SpaceX as it caps off its first trading week. And in terms of excitement, SpaceX gets top grades as well, with a nice seat in the AI revolution and perhaps the only seat in the emerging space economy.

With one of the best stewards in newly minted trillionaire legend, Elon Musk, leading the show, perhaps a big, fat premium makes sense, especially given the novelty of owning a piece of a company that strives to take the fiction out of science fiction.

With a price-to-sales (P/S) multiple eclipsing 110 times, though, I do think that many new investors could be at risk of overstretching themselves on risk. SpaceX seems unbounded when it comes to the directions the firm could go as it eventually looks to set foot on Mars. But what about the profitability prospects and the hefty losses piling up, especially for AI efforts?

Apart from SpaceX, the semiconductor industry and chokepoints of the AI boom (think the connectivity and energy infrastructure layer) seem to be the “new” hot things to rotate towards. But what if it’s the easy plays that are stuck that are the places to be?

Keeping it simple and obvious might be the way to go

Could investing really be simpler than searching out the AI chokepoints and placing big bets on firms while they’re in the midst (or maybe closer to the end) of a cyclical ascent? Time will tell. Either way, I think Mr. Ackman is spot on when he sticks with a name like Microsoft, even though I’m sure some investors will question the man’s move since it’s not at all novel nor exciting.

It might be a bit more obvious, old-fashioned, value-oriented, and yawn-worthy, but it’s definitely a move that I think has a greater chance of paying off. Given Mr. Ackman’s concentrated approach, I do think Pershing Square is set up very well to thrive once quality starts to outshine sheer momentum and newness.

Whether it’s higher rates or something else (maybe a pullback in spend by the hyperscalers themselves) that sparks a rotation, though, remains the big question. In terms of risk/reward, though, I think Mr. Ackman and Pershing Square are in a far better spot than the momentum chasers looking for novelty and thrills instead of undervaluation and long-term durability.

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