Wednesday, October 29, 2008

Is Sears Holdings (SHLD) the Next VW?

If you missed the VW story from yesterday, Porsche bought basically all the outstanding float in VW forcing panicked trading by the 12% of shares short. Anybody attempting to cover or forced to cover had virtually nobody left to sell in the open market. This forced the stock trading on the DAX up nearly 500% and briefly gave VW the largest market cap in the world over Exxon. Gotta love the free market system that spins out of control.

  • Volkswagen’s stock soared to as high as 1,005 euros a share, about $1,258, on Tuesday before closing at 918 euros. The shares ended last week at 210 euros.
  • The rise appears to have come from a short squeeze of historic proportions, as speculators who had borrowed the stock and sold it scrambled to buy shares. Many had expected the share price to fall after Porsche gained control and stopped buying shares.
All this brings me to the story regarding Sears Holdings (SHLD). Most people commonly know it as the owner of retail gians Sears and KMart or by it's valuable brands like Craftsman or Kenmore. Neither retail operation is very impressive anymore so why would we care about the stock? Many reasons exist because of the valuable brands they control, but more importantly because SHLD is one of the largest commercial real estate owners in the US. As a owner of 250M square feet of valuable mall real estate with limited debt, SHLD has a very valuable asset that isn't being recognized by the market. Check out a good summary at seekingalpha.com if you want to read more about the value prospects of SHLD as this isn't really the point of this article.

Rather I want to focus on the possibility of a VW type short squeeze. Regardless of what people argue you can't deny that a long list of very successful investors are big holders in SHLD. From Eddie Lampert to Bill Miller to Bill Ackman. Its typically not wise to bet against these guys. If they see value, then it likely exists.

Looking at the list of holders from Auguest 31st below, you can see that more shares were short then the public float not controled by these strong investors. Now its very possible that a Legg Mason or some other fund was forced to sell shares recently to reduce this imbalance, but still its very likely that shorts also piled on to record amounts. All at the same time, SHLD continues to buyback shares further reducing the float. One by one these shares are being taken off the market, yet shorts continue to add. Betting that they can outsmart Lampert and the others. Don't be surprised if you find one day that a Pershing Square Capital comes in and buys 2M, or 5M, or 10M shares to dramatically reduce the float and squeeze the shorts. Combined with the buyback and all of a sudden you get a VW type situation where all the public shares are gone yet a huge short position exists with virtually no willing sellers. Not to mention the naked shorting implications or inability to short if these fund refuse to allow their shares to be borrowed.


Holder Name—Shares—% - as of 8/31/08

ESL Investments, Inc.—65,639,184—51.0%
Fairholme Capital Management LLC—16,110,090—12.5%
Legg Mason Capital Management, Inc.—12,503,168—9.7%
Pershing Square Capital Management—6,746,568—5.2%
ClearBridge Advisors—4,789,523—3.7%
Perry Capital—2,694,95—2.1%
Davis Advisors—2,020,96—1.6%
Dalal Street, Inc.—517,608—0.4%
T2 Partners Management LP—50,625—0.0%
Greenlight Capital, Inc.—11,240—0.0%

Total held by above—111,083,919—86.2%

Total Outstanding—128,800,000

Short Interest—33,656,888—26.1%

Share Not held by Above Holders—17,716,081—13.8%


Now I'm not that familiar with the VW story but the fundamentals of the auto industry are pretty weak so that part of the scenario matches SHLD. Hence the resilence of the shorts to ignore the resounding bullish case. Whether Prosche really sees the same compelling value in VW like these big funds do with SHLD thats beside the point. Many people with lots of money see value and thats all that matters. Betting against them at this point leaves you vulnerable for a epic VW type short squeeze. Will we wake up one day to find out a hedge fund drained the remaining float (don't doubt that they could coordinate this just like the financial bear raids)? Or maybe Lampert just sold a chunk of real estate for a huge premium to its current valuation (which at this point is virtually zero)?

I'm buying because of the valuation presented. One where I could easily conjure up the prospects of SHLD trading north of $400, but this new angle is hard to ignore and if it happens be ready to sell quick.

Long SHLD in both funds and personal.

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