Coke in the Crosshairs: Bill Ackman’s Next Target?

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Coke in the Crosshairs: Bill Ackman’s Next Target?

by Charles Lewis Sizemore, CFA

Bill Ackman is known for having something of a nasty temper . . .  and not responding well to criticism. His brawl with fellow hedgie Carl Icahn on live TV two years ago over Herbalife (HLF) might be the most high-profile fight among financiers in history.

Well, now Ackman is trading barbs with another long-term legend of the industry, Warren Buffett’s Berkshire Hathaway (BRK.A) partner Charlie Munger, over their respective positions in Valeant Pharmaceuticals (VRX) and Coca-Cola (KO).

Munger — who has never been shy about giving his opinions — called Valeant “deeply immoral” for raising the prices of its drugs. Ackman — who is heavily invested in Valeant at the moment — fired back by saying Berkshire’s investment in Coca-Cola is “deeply immoral” because it “does enormous damage to society” and “[displaces] the water children consume with sugar water”.

Ackman Isn’t Entirely Wrong

I don’t for a minute believe that Bill Ackman cares about the world’s children. And for that matter, I don’t know that Buffett or Munger particularly care all that much either. I’m not calling any of these men “immoral,” mind you. It’s just that none of them became billionaires by running a socially responsible portfolio.

That said, Ackman’s view on Coca-Cola and on sugary soft drinks in general is slowly becoming the “correct” consensus view. I wrote two years ago that soft drinks were the “new Big Tobacco” in the minds of investors and government regulators alike. The words that are used to describe junk food today, speaking of it as a public health menace, sound a lot like the words used to describe cigarettes 30 years ago.

So, given Ackman’s temperamental nature . . .  and his tendency to back up his bluster with oversized short positions  . . .  might Coca-Cola stock be the next target for this high-profile activist investor?

My bet is no, or at least not right now.

Why Coca-Cola Stock Isn’t Doomed

Ackman’s attack on Coke — which is one of Berkshire Hathaway’s largest holdings — is more of a knee-jerk reaction to having his own top holding blasted by Munger. Think of it as the Wall Street version of two schoolboys trading “yo mama” jokes on the playground.

But there are deeper reasons why I don’t expect Ackman to make a major move on Coca-Cola, long or short. It’s absolutely correct that Ackman sees himself as an activist investor in the truest sense. While he hopes to make money in the process, in his mind he really is making the world a better place by punishing ineffective management teams and agitating for change.

Sometimes, he gets it wrong. Very wrong. This was certainly the case when he brought in former Apple (AAPL) executive Ron Johnson to turn struggling retailer JCPenney (JCP) around. Johnson was an unmitigated disaster that made a bad situation worse, and the blame ultimately falls on Ackman’s shoulders. But in Ackman’s defense, JCP was a mess, and the company really did need a radical shake-up.

It’s hard to make the same claim for Coca-Cola.

It’s not that Coke is lagging behind its peers or that it is being uniquely mismanaged. The company’s woes are a result of changing consumer preferences and lower soda consumption. The best move for Coca-Cola is to continue diversifying its product portfolio, and the company has been doing exactly that.

You also can’t really argue that Coke is being stingy with its shareholders. Coca-Cola stock is one of the highest-yielding stocks in the S&P 500, and it has raised its dividend for 53 consecutive years.

But what about Coca-Cola as a short candidate?

A Short Case for Coke?

Maybe. But when Ackman makes a large short, he likes to have that proverbial smoking gun. That was certainly the case in his short of Herbalife. While I think Ackman was wrong about Herbalife being a Ponzi scheme, the man did his research and even spent a small fortune on private investigators to prove his case.

While Coca-Cola might very well be guilty of selling sugar water to kids (and the rest of us), no one believes they’ve done anything that is illegal or anything that would cause the share price to fall out of bed.

I don’t expect Ackman to do much of anything with Coca-Cola stock, and I think that’s the right call for now. At the right price, I’d consider buying it, even given its growth issues. Tobacco stocks have been fantastic investments for a long time, despite their shrinking business, due to their attractive pricing and high dividend yields. So at the right price, you can still make a lot of money on the stocks of companies in terminal decline.

But today, Coca-Cola is not priced like a tobacco stock. In fact, it trades at a slight premium to the broader market. The best move right now is no move at all.

Returning to Ackman for a moment, the Pershing Square manager is having a rough year in 2015, down about 20%. But just last year, he was one of the best performing hedge fund managers in the world. If you believe that Ackman will right the ship, your best bet might be to buy his closed-end fund, Pershing Square Holdings (Amsterdam:PSH), which trades in Amsterdam.

U.S. investors should be careful here, however, as owning the fund can make your tax situation messy if you’re investing via a regular taxable account. So before buying, make sure you chat with your accountant or tax advisor.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. He is currently long PSH.

Photo credit: Insider Monkey

This article first appeared on Sizemore Insights as Coke in the Crosshairs: Bill Ackman’s Next Target?