Bill Ackman and his hedge fund Pershing Square Capital Management have made their biggest investment ever, and the target is $22 billion industrial gas company Air Products & Chemicals (APD). Pershing Square now reportedly has a 9.8% stake, or $2.15 billion in Air Products stock.
So … who cares?
I know, I know. A $2.15 billion buy isn’t chump change, APD stock is up about 4% on the news, and the move into an industrial play like Air Products may signal something about a cyclical recovery for similar stocks — be they small like APD, Praxair (PX) or Airgas (ARG), or larger industrials like Dow Chemical (DOW) or 3M (MMM).
Air Products, as Ackman told CNBC on Tuesday, is “a great business that is undervalued” with a broad customer base, diverse product line and a decent moat in an industry with high barriers to entry. “We have some ideas on how to add value,” he added.
But let’s not read too much into this Air Products deal.
For starters, Ackman has been in the news plenty this week, what with another Herbalife (HLF) earnings report that went right for the company and painfully wrong for Ackman’s short-side trade. Throw that in with an ill-advised long bet on JCPenney (JCP), and clearly Ackman isn’t some kind of all-star this year, with pretty significant underperformance.
And more importantly: Beyond Ackman and Air Products, it’s important to understand that the “smart money” isn’t nearly as smart as we think they are. Active management chronically underperforms the major indices like the S&P 500, and analyst targets are frequently so far off to the point of being absurd when it comes to long-term price targets for big-name stocks.
If you like APD because you like APD, more power to you. But investing just because Bill Ackman likes this company is the very definition of herd mentality.
And that’s no way to get ahead on Wall Street.
- Earnings keep proving Ackman and the bears wrong on Herbalife. (The Slant)
- ICYMI: Active managers were beaten by indices yet again in 2012, and are likely to be beat in 2013, too. (CBS Moneywatch)
- Why are hedge funds so wrong if they are so smart? (The Atlantic)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at email@example.com or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.