Five Motley Fool Reasons to Sell Sears
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Knowing when to sell any asset, particularly a publicly traded stock, is just as important as knowing when to buy, if not more so.
As such, The Motley Fool has five reasons that offer guidance as to know when to sell. Sears Holding (NASDAQ: SHLD) fits all five, despite being up 72.56% for 2012. Formed in 2005 from the merger of Sears and K-Mart by hedge fund manager Eddie Lampert, Sears Holding offers many, many reasons for share holders to sell, which has obviously been happening lately as the stock is down more than 10% for the last week of trading.
Reason No. 1: Better opportunities
There are many better opportunities than Sears Holding, a retail chain operating in the United States and Canada, in its sector. The most obvious is Wal-Mart (NYSE: WMT). Legenday investor Warren Buffett has been loading up on Wal-Mart this year: 'nuff said there. Both Wal-Mart and Target (NYSE: TGT) are superior buys based on profit margins and dividend income yields (Sears does not have offer a dividend):
WMT Dividend Yield data by YCharts
Reason No. 2: Business changes
More and more shopping is being done on-line through companies such as Amazon (NASDAQ: AMZN) and eBay (NASDAQ: EBAY). While Sears Holding is trying to compete on-line, it is hopelessly outclassed by eBay and Amazon. More and more prefer to order over the Internet rather than spend over $4 a gallon on gas and fight traffic to hang for hours at the mall for goods that can be delivered the same day, in some areas. The stark contrast in net income positions and trends between Sears Holding, eBay and Amazon on the following chart is illustrative.
SHLD Net Income data by YCharts
Reason No. 3: Valuation
Sears is up way too much this year for its underlying fundamentals. Earnings-per-share growth is down for the year, last five years, and is expected to fall by 56.10% for the next year. The sales growth trend is similarly bearish. Sears Holding has a negative profit margin of 6.72% and a negative return-on-investment of 43.83%.
Reason No. 4: Faulty investment thesis
It is becoming more and more obvious that Eddie Lampert did not create Sears Holding to be run as a department store to compete with Target or Wal-Mart. He is monetizing the best assets rather than trying to win business away from Wal-Mart and Target. Lampert bought at the wrong time, just before The Great Recession hit, and got caught. He is now trying to make the best of a bad, bad situation, selling assets and booking his profits when he can. 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."
Reason No. 5: It keeps us up at night
Although up for 2012, Sears Holding is down for the last week (10.97%), month (0.69%), quarter (3.1%), six months (20.51%), and 52 weeks (4.64%) of market action. That is a trend that should cause anyone to lose sleep. The amount of debt increasing over the last five years for Sears Holding is also troubling, particularly for a company losing money and business:
SHLD Debt to Equity Ratio data by YCharts
Chairman Eddie Lampert just bought over $126.2 million worth of the stock of Sears Holding. He is, by far, the largest shareholder. He is also another large reason to sell. Even though he is not the chief executive officer, Lampert has been tabbed the "Worst CEO" for his control of Sears Holding and his performance in that capacity. In this regard, it is certainly safe to say that the management of Wal-Mart, Target, Amazon and Ebay is far superior.
Eddie Lampert could be buying so much Sears stock to execute a classic short squeeze. There is certainly a large target as the short float is 11.27%. A short float of 5% is considered to be troubling for a company. With Sears Holdings down double digits for the last week of trading, the bullish impact of Lampert's massive buying in September has clearly subsided with the short float still remaining ever prominent, as are the reasons to sell.
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Fool blogger Jonathan Yates does not own any of the stocks mentioned in this article.
