Bill Ackman saw the coronavirus carnage coming for the market.
The Pershing Square founder said to CNBC last week that “hell is coming” for the U.S. economy due to the pandemic and urged President Donald Trump to shut the country down.
“What’s scaring the American people and corporate America now is the gradual rollout” of community lockdowns to slow the spread of COVID-19, Ackman said. “We need to shut it down now. …This is the only answer. America will end as we know it. I’m sorry to say so, unless we take this option.”
“Beginning in late January, I was getting increasingly bearish and I woke up with a nightmare,” Ackman said. “And my nightmare was you have this virus that replicates and infects incredibly rapidly.”
So it has. Confirmed cases of the coronavirus have surged past 530,000 globally, and on Thursday, the U.S. became the country with the most confirmed cases of the virus with at least 83,800 infected.
As cases have skyrocketed, several states have issued stay-at-home orders for residents. Workers are working remotely as offices have been forced to close. Shops and restaurants have shut down. But unlike countries like China and Italy where the virus spread as wide as it has here, the Trump administration has yet to order a country-wide lockdown in an effort to slow the spread of the virus.
And just as cases of the deadly virus have surged higher and higher each day, stocks have fallen into a bear market. Even with the gains seen this week on the hopes of Congress delivering a massive $2 trillion stimulus package, the S&P 500 is still down just over -22% since its record high just a month ago.
Ackman envisioned the bearish turn coming for the market, and his Pershing Square spent $27 million on market hedges against a coronavirus crash including credit protection on various investment-grade and high-yield credit indexes, which Ackman said the fund was able to purchase at near-all-time tight levels of credit spreads.
Pershing cashed-out of these hedges this week to the tune of $2.6 billion.
With that massive influx of cash, Ackman said he is adding to existing positions in a few key stocks: Agilent Technologies (NYSE: A), Berkshire Hathaway (NYSE: BRK.A, BRK.B), Hilton (NYSE: HLT), Lowe’s (NYSE: LOW), and Restaurant Brands (NYSE: QSR). The billionaire investor also said he made “several new investments including reestablishing our investment in Starbucks (NASDAQ: SBUX),” which his fund had closed back in January.
“The proceeds of the hedges have enabled us to become a substantially larger shareholder of a number of our portfolio companies, and to add some new investments, all at deeply discounted prices,” Ackman whole in a letter to shareholders on Wednesday.
And this has already proven to be a smart move. As of this writing, each of these stocks are up for the week. Agilent shares have gained 12%, Berkshire Hathaway is up 5.5%, Hilton and Lowe’s are both up just over 26%, Starbucks is up nearly 14%, and Restaurant Brands is up a whopping 45.7% over the last week.
However, Ackman cautioned, “We continue to expect that markets (and our performance) will remain volatile, and therefore, new opportunities may present themselves that are superior to investments we currently own. This may lead us to sell certain of our existing holdings including investments we recently purchased. We may also choose to reestablish similar or different forms of hedges or raise more cash based on developments with the coronavirus and other market factors. In other words, we are more likely to have higher portfolio turnover in this environment.”
“We are in one of the most challenging periods of time for our country, and for the world. Thousands of people have or will soon become severely sick, and many will die. This is a tragedy that could have been prevented with better long-term planning, which should have begun more than a decade ago. I have always said that experience is making mistakes and learning from them. And learn from this we must,” Ackman concluded.