There’s hidden value in these blue chips that other investors are missing.
Bill Ackman of Pershing Square Holdings and Andreas Halvorsen of Viking Global Investors are two highly regarded billionaire-level investment managers. In the second quarter, their companies added new positions in two stocks that just happen to be members of the prestigious Dow Jones Industrial Average, an index that tracks 30 blue chip stocks.
Ackman’s firm reported a position worth $229 million in Nike (NKE 0.77%), while Viking Global disclosed a $478 million investment in McDonald’s (MCD 0.11%). Let’s explore why these billionaires like these stocks even as both are navigating headwinds in the apparel and restaurant industries right now.
1. Nike
Ackman has a knack for spotting value where others don’t. Over the last 20 years, Pershing Square delivered annualized returns of 16%, and his net worth has grown to $9 billion in recent years, according to Forbes.
Share prices of Nike are down 53% from highs set in 2021, which led Ackman’s Pershing Square to start a new position in Q2. The top athletic apparel brand was hit by weak consumer spending trends that challenged several retailers over the past couple of years.
Nike is a large company that generates $51 billion in annual revenue, two-thirds of which is from footwear. Fiscal 2024 (which ended in May) revenue was flat year over year. However, most of the weak sales trends are associated with Nike’s lifestyle products. Its performance products for several sports its services are still posting a double-digit sales increase last quarter.
This suggests Nike has a clear path to improvement if it shifts more of its sales mix to performance products, like running and basketball shoes, which have been the heart of the brand for 50 years.
Meanwhile, Nike is keeping profits up to fuel dividend payments to shareholders. Its net income grew 12% in fiscal 2024, and it paid out 38% of its earnings in dividends. At its current quarterly payout of $0.37 per share, Nike’s forward dividend yield is 1.76% — its highest yield in a decade.
The stock still trades at a fair valuation, but its forward price-to-earnings (P/E) ratio is at 26, which isn’t cheap. Still, it’s a reasonable price for a top brand that can still grow its earnings at double-digit rates over the long term.
The recent investment suggests Ackman believes Nike’s brand is undervalued by investors right now. Nike has a clear solution to return to growth by doubling down on innovation within its sports categories, and good execution against this strategy could send the stock back toward its previous highs within the next two years.
2. McDonald’s
Viking Global Investors founding partner and CEO Andreas Halvorsen has a net worth of $7.2 billion, according to Forbes. The company manages a large U.S. equity portfolio, worth $26 billion at the end of Q2. One of its new positions is a $480 million stake in McDonald’s.
Like Nike, McDonald’s reported weak sales under macroeconomic headwinds this year. Because this weakness is spreading across multiple industries, it doesn’t reflect anything negative about McDonald’s competitive position. This environment plays to McDonald’s strength as a value-based brand.
The Golden Arches reported a 1% year-over-year decrease in global comparable sales in Q2. Despite this soft performance, the stock held up well this year and is close to hitting new highs. The reason for the stock’s performance in light of weak sales might explain why Viking Global likes it.
McDonald’s is more than just fast food. It’s also a real estate company. It has a long history of owning the land its franchised restaurants sit on, which provides lucrative opportunities in leveraging these property values to ultimately deliver profitable growth for shareholders.
As of Dec. 31, 2023, the company held $20 billion of buildings and improvements on owned land on its balance sheet. It owned approximately 57% of the land and approximately 80% of the buildings used by its restaurants.
McDonald’s plans to increase its global restaurant base to 50,000 by 2027, which obviously will take advantage of its real estate expertise.
The combination of its franchise model, where 95% of its global restaurants are run by local owners, and its real estate strategy is why McDonald’s generated a high margin of $8 billion in net profit on $25 billion of revenue over the last year.
While McDonald’s posted an 11% year-over-year decline in earnings last quarter, it pays out around half of its earnings in dividends. It currently pays a quarterly dividend of $1.67, bringing its forward yield to 2.3%. That dividend appears very safe, given the manageable payout relative to earnings and McDonald’s profitable franchise business strategy.
The stock’s above-average dividend yield and attractive forward P/E of 24 make it a solid buy for the long term.
John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.