1 Incredible Billionaire Stock Up 91% in 2 Years: Is It Time to Buy?

Due to industry regulations, large investment companies are required to reveal their portfolio holdings every quarter. This is a gold mine for retail investors, as they can search a big list of positions to find potential buying opportunities.

Bill Ackman, a billionaire hedge fund manager who runs Pershing Square Capital Management, is a popular investor to follow. His firm had a 13% stake in a thriving company as of Sept. 30 last year, a position Ackman has owned since 2016.

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This top restaurant stock has soared 91% just in the past two years. Is it time you buy shares?

Fitting the criteria

Ackman's investment philosophy rests on owning competitively advantaged businesses that possess numerous positive traits that benefit long-term investors. He also tends to focus on consumer-facing enterprises.

Enter Chipotle Mexican Grill (NYSE: CMG), the Tex-Mex pioneer known for its fast service, simple menu, and consistent food. Pershing Square first bought a stake in 2016, which was a contrarian move given that Chipotle was still dealing with the aftermath of a scary E. coli outbreak at some of its restaurants.

However, that bet worked out well. One reason why is due to growth. Chipotle's Q3 2024 revenue of $2.8 billion was 100% higher than in the same period five years earlier. That's a clear sign of its popularity among consumers.

What's more, having a sizable revenue base gives Chipotle some cost advantages. This is particularly true when procuring key food inputs, spending on marketing and tech investments that can be leveraged over an expanding store footprint, and when trying to acquire attractive real estate.

Alongside consistently robust same-store sales increases that defy industry norms, unsurprisingly, this top-line gain is also propelled by new store openings. Chipotle is expected to have opened 300 net new locations last year, bringing the total count to over 3,700. The business is on its way to one day getting to 7,000 stores in North America, which is management's explicit target over the long term.

It's safe to assume that, based on the trajectory Chipotle has been on, reaching that goal is a realistic outcome. That could lead to revenue growth over many years.

Not on the value menu

The problem for new investors is that Chipotle's monster success isn't a secret. The stock continues climbing higher, leading to a steep valuation. Shares currently trade at a price-to-earnings (P/E) ratio of 54, more than double that of the S&P 500.

Some investors might be totally fine paying that rich valuation for what they deem a high-quality business. As mentioned before, Chipotle's growth has been superb. And it's definitely easy to believe this will continue in the years ahead. This business is also extremely profitable, boasting an operating margin of 16.9% in Q3. That figure is up from 8.2% in the third quarter of 2019.

That profitability is fueled by Chipotle's proven pricing power, which is a characteristic that legendary investor Warren Buffett says is the leading indicator of a quality business. The management team has raised menu prices on multiple occasions in recent years to fight off inflationary pressures. However, based on sales trends, consumers continue to find tremendous value in its menu items.

As of Sept. 30, Chipotle made up 13% of Ackman-led Pershing Square's portfolio. Even after such a huge price gain, he doesn't think the valuation is lofty enough to warrant selling the stock entirely although he has trimmed it in recent quarters.

I, however, adopt a different view. No business is so good that investors should completely ignore valuation. Paying a high P/E ratio not only means there is no margin of safety but it also creates a major hurdle to clear in order to produce adequate investment returns in the years ahead. Chipotle is a stock that's best kept on the watch list for now, at least until there's a sizable pullback.

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Neil Patel and his clients have no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chipotle Mexican Grill. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.