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Bill Ackman's love affair with Canadian Pacific Railway Ltd. is over. Now it's up to other investors to decide if they need to break it off, too.
Mr. Ackman, the activist investor who forced a major makeover at the Canadian rail giant over the past 19 months, announced Monday that his hedge fund Pershing Square Capital Management LP would sell up to 7 million shares of CP in the open market over then next six to 12 months. After building up its stake to more than 14 per cent of the company, Pershing's sale would trim its stake back to less than 10 per cent.
CP's stock, which has ridden Mr. Ackman's activist agenda to a doubling of its price over the past year, shed nearly 5 per cent over the past two days on Mr. Ackman's news. Investors want to know what Mr. Ackman's decision implies about the company, and their investment in it.
There may be more than one reason why Mr. Ackman has lost his taste for CP. Let's consider a few possibilities.
1. It's not you, it's me.
In (partially) dumping CP, Mr. Ackman invoked this classic dumpers' line. Nothing against CP, he said, but its share-price success had swelled it to 26 per cent of Pershing's holdings, and that's too much concentrated in a single stock. Trimming the CP position is just good portfolio management.
That is perfectly logical. Yet Mr. Ackman has never been known for his investment diversification; his fund has always focused on a small handful of aggressive bets. Perhaps having more than a quarter of his fund in one stock did indeed cause him to find religion, but that's probably not the only reason he's selling now.
2. It's for the money.
If Pershing sold the 7 million shares today, it would get nearly $1-billion – roughly triple what it paid for them in the fall of 2011. After taking a major bath on a couple of very big, very bad calls on J.C. Penney Co. Inc. and Herbalife International Inc. in the past year, maybe Mr. Ackman felt the need to take some cash out of his big winner and use it to cover shortcomings elsewhere.
3. This pony has run its course.
At Tuesday's prices, CP's stock was trading at a trailing 12-month price-to-earning (P/E) ratio of nearly 30 times. U.S. rail companies on the S&P 500 index have an average P/E of 17; CP's domestic rival, Canadian National Railway Co., trades at a P/E of 18. With the price expensive and the big gains from CP's restructuring already largely priced into the stock, Mr. Ackman may be cashing out near the top.
4. A Keystone change of heart.
Until now, many observers had assumed that Pershing's big position in CP was at least in part a bet that the Obama administration would reject the Keystone XL pipeline – which would be a major boon to the fast-growing use of rail to transport Canadian oil. Perhaps the decision to start unwinding the CP position is a sign that Mr. Ackman is less sure of the political mood on Keystone – a hedge-fund manager hedging this political bet.
David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow him on Twitter at @parkinsonglobe.
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David Parkinson