More than 126 Million Reasons Eddie Lampert Thinks Sears is a Good Buy

Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

About insider buying, Motley Fool co-founder and CEO Tom Gardner stated that if there was just one factor he had to use for investing that,  "I wouldn't look for growth.  I wouldn't look for a great balance sheet. I'd focus only on insider ownership."  

The mother-ship has landed!

Billionaire hedge fund manager Eddie Lampert, also the Chief Executive Officer of Sears Holding Corp. (NASDAQ: SHLD), recently bought over $126 millon worth of the stock at $52.75 a share.  At present, Sears Holding is trading around $61.71.

Along with this extradorinaly high level of insider buying, however, is also a high short position on Sears Holdings.  A short position of 5% is considered to be troubling for a company.  The short position on Sears Holdings is 11.27%.

What is probably the most troubling for those holding a short position is that Lampert appears to be implementing the mother of all short squeezes.  Controlling almost two-thirds of the stock, Lampert is in a unique position with the resources to "bust the shorts" on his own accord.

Allowing for this is the significant amount of hidden asset value that Sears has, according to Cliff Orr, an analyst with Privet Fund, a hedge fund.   Due to undervalued real estate and the cash flow from KCD LP, the appliance brand subsidiary, Orr sees Sears as having a fair value of around $100 a share.

Another very savvy investor, Bruce Berkowitz of Fairholme, owns a huge chunk of Sears Holding.  At present, Berkowitz owns almost 16% of the stock.  Like Orr, Berkowitz sees long term value in the real estate value of Sears Holdings.

Lampert is obviously moving to unlock this value.  This certainly makes sense as he is, by far, the largest shareholder and the chief executive of the company.

Sears Holdings is undertaking measures to raise cash and cut costs.  Inventory levels have been reduced by about $800 million.  General Properties purchased eleven stores for $270 million.  Lands End, an online and catalogue retailer, is on the market with an expected price in the range for $1.5 to $2 billion, based on the 2011 sale of J. Crew.   Sears Hometown, a network of 1,000 smaller stores, will be spun-off in a $400 million rights offering later this year or in early 2013.

The most valuable entity is KCD LP, due in large part to Kenmore brand appliances.  At present, Kenmore controls about 18% of the appliance market in the United States.  The Kraftsman and Diehard brands are also very valuable assets of KCD LP.  Sears is also the #1 retailer for fitness equipment in the United States.

In recognition of these undervalued assets, no doubt, Eddie Lampert has increased his personal stake in Sears Holding from 18% to over 22% since last December.  

It is not difficult to see why the shorts have circled Sears Holding, though.  Target (NYSE: TGT) and Wal-Mart (NYSE: WMT) have bludgeoned Sears Holdings.  Both Wal-Mart and Target have a wider selection of products and services, particularly groceries, to lure shoppers into the stores.  This is working as Sears is losing money with a negative profit margin of 1.39%.  By contrast, both Wal-Mart and Target are profitable.  Target has a profit margin of 4.20%.  Wal-Mart has a profit margin of 3.51%.


<img src="http://media.ycharts.com/charts/0a23b2f54378ec062fffc0efea0cb7f4.png" />

WMT Profit Margin data by YCharts



Sales growth is also falling at Sears, both on a quarterly basis and for the past five years.  Earnings-per-share growth for this year is off.  For the next year, earnings-per-share growth is projected to fall by double digits.  

That is hardly the revenue posture that inspires an investment of more than $126 million.

As bearish as the financials are for Sears, however, the stock performance has been very bullish.  Year to date, Sears is up by 94.18%.  The last month has seen the share price rise by another 9.03%, with much of that coming after the insider buying report by Lampert.

Eddie Lampert is a very, very savvy investor and a very, very successful investor.  What his intentions are with Sears Holding are unknown.  He could be trying to create a Berkshire Hathaway (NYSE: BRK-A) -type vehicle to use as his holding company for massive investments in the retail sector.  In November 2006, The Chicago Sun Times reported that Sears Holding was interested in some or all of the following companies: Home Depot, SafewayGapBJ's Wholesale ClubRadio ShackPep Boys, and Anheuser-Busch. That could explain his massive buy to elevate the stock price so it could be as a currency for a stock-based acquistion.

Or he could be seeking to sell off the assets of Sears Holding after enhancing the value, like a private equity owner.  About this, Robin Lewis, Chief Executive Officer of the Robin Report, stated that, "He is very cleverly and intelligently figuring out how to manage the business down, finding himself an exit strategy and taking as much cash out of it as he can."

That certainly seems to be contradicted by the recent purchase of $126.2 million by Lampert, though.  In addition, Lampert has controlled Sears since 2005 and been its chief executive officer.  Private equity generally tries to sell a company in a much shorter time frame.   Warren Buffett generally leaves management in place when he acquires a company for the portfolio of Berkshire Hathaway.  Buffett also says that "long term is forever" (he bought a huge stake in Wal-Mart this year, too).  Another difference here is that Lampert has loaded Sears Holding up with debt, as private equity ownership is wont to do, while Berkshire Hathaway has a debt-to-equity ratio less than half the size.  

The Great Recession, no doubt, has played a role in altering the original plans of Lampert.  However, there have been a number of asset sales.   A chunk of Orchard Supply Hardware was sold to Ares Management, a private equity firm, in 2005.   Stores have been sold.  Land's End is now on the market.

Lampert would seem to be operating a hybrid: creating a Berkshire Hathaway investment to acquire retail assets to be sold for a profit.  Obviously, a higher share price for Sears Holdings enhances whatever the objectives are of Lampert for the company.  It also decimates the short positions, which leads to a soaring price when the covering takes place.  For the individual investor who is long, it is certainly proving to be a profitable exercise, no matter what Lampert's original goals or the ultimate destiny is for Sears Holding.  




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