Bill Ackman is one of the best-known billionaire investors in the world. His hedge fund, Pershing Square Capital, focuses on a few high-quality businesses where Ackman feels the stock has become mispriced, relative to its value. He will then buy shares and use his influence to unlock shareholder value.

As an activist investor, he can focus on only so many businesses at once. That means he only swings at what he thinks are his biggest opportunities. As a result, Pershing Square has a highly concentrated portfolio, and just three stocks account for more than 53% of the entire $10.6 billion in public equity holdings.

1. Hilton Worldwide (19.7%)

Hilton Worldwide (NYSE: HLT) has grown to become Ackman’s largest position for Pershing Square. The investor first accumulated shares of the largest hotelier in the world in 2016, but it wasn’t until 2018 that he had an opportunity to establish a significant position in the stock during the market downturn.

“Hilton’s extensive and growing network of brands and properties offers a significant and self-reinforcing value proposition to both guests and hotel owners, which creates a strong competitive moat around the business,” Ackman wrote to investors in 2018.

That moat has only gotten stronger as Hilton expanded its brand count to 24 and counts over 7,700 participating hotels. Its loyalty program has grown from 80 million, when Ackman invested in 2018, to over 195 million today. The two create a network effect: As more hotels join the Hilton portfolio, it attracts more customers to the loyalty program, and vice versa.

Hilton has been growing quickly to support its expansion. Revenue per available room grew 3.5% in the second quarter, and management expects full-year growth between 2% and 3%. It also has a pipeline of 508,300 more rooms in development. As Hilton expands its management operations, it should see nice margin expansion as it increases revenue per room.

While Ackman sold some Hilton shares to make room for smaller new positions in the second quarter, his firm still holds about 9 million shares worth $2.1 billion. That makes it his largest position. At its current price, it trades near the high end of its historical enterprise value-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) range, excluding the impact of the COVID-19 pandemic. Investors may want to review Hilton more carefully before following Ackman’s lead.

2. Alphabet (18.2%)

While many saw artificial intelligence (AI) as a major threat to Alphabet‘s (NASDAQ: GOOG) (NASDAQ: GOOGL) main Google search business, Ackman saw the opportunity for the company to take advantage of recent innovations in AI. He bought shares of the company in the first quarter of 2023, just as the AI boom was getting started. He has since added to his position and now holds 7.5 million C shares and nearly 4 million A shares. Combined, they’re worth about $1.9 billion.

Google’s position as one of three big public cloud platforms has resulted in strong operating results for its Google Cloud business. It surpassed $10 billion in quarterly revenue in the second quarter, up from $7.3 billion at the end of 2022.

Alphabet is spending heavily on AI to support the growth of Google Cloud and build new AI features in Google Search. The efforts have paid off as management says its new AI overview feature in search has increased engagement and satisfaction with search results. That said, the company has cut expenses in other areas, leading to an expanding operating margin.

The stock currently trades at a forward price-to-earnings ratio (P/E) of around 20. Meanwhile, analysts expect AI and other trends to drive earnings growth at Alphabet above 20%, on average, for the next five years. That makes Alphabet a very attractive stock at its current price.

3. Chipotle Mexican Grill (15.5%)

Ackman established an initial position in Chipotle Mexican Grill (NYSE: CMG) in 2016 after food safety concerns led to a huge sell-off for the stock. He gobbled up 2.9 million shares by the end of that year. While he’s sold about 80% of that position since then, Chipotle remains one of Pershing Square’s largest holdings, worth about $1.6 billion.

He cited Chipotle’s strong brand, differentiated product, and substantial scale as reasons for believing the company could recover from its food safety challenges of the previous year. He saw an opportunity for the chain to double its store count from approximately 2,200 at the end of 2016.

Today, traffic has more than recovered, and Chipotle operates 3,530 restaurants. Management said it envisions opening 7,000 locations long term.

Chipotle is seeing strong performance from existing stores, even as it opens new locations at a strong pace. Same-store sales increased 11% in its most recent quarter, driven by both transaction volume and average ticket sizes. It’s also building on its Chipotlanes drive-thru concept, which includes about 80% of new-store openings.

These can help drive higher same-store sales growth. Strong same-store sales have led to improved restaurant-level operating margins, which climbed to 28.9% in the second quarter, up 140 basis points year over year.

Chipotle recently lost its CEO Brian Niccol to Starbucks. As CEO since 2018, he was largely responsible for much of the recovery and success at the company since Ackman took a position in late 2016. However, Chipotle has an excellent playbook for success and a long runway for continued growth.

That said, the stock’s valuation has grown to reflect the company’s strong prospects. Shares currently trade at 44 times earnings estimates for next year. With that kind of premium, investors may be better off waiting for a pullback before placing their next order for Chipotle stock.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Alphabet and Starbucks. The Motley Fool has positions in and recommends Alphabet, Chipotle Mexican Grill, and Starbucks. The Motley Fool recommends the following options: short December 2024 $54 puts on Chipotle Mexican Grill. The Motley Fool has a disclosure policy.

Billionaire Bill Ackman Has 53% of His Hedge Fund’s $10.6 Billion Portfolio Invested in Just 3 Stocks was originally published by The Motley Fool