IB Net Payout Yields Model

Fund Manager of the Year Remains Bullish on Sears Holdings

Sears Holdings (SHLD) remains one of the most debated stocks in the universe of investing. Shorts claim that the PE is too high. Longs (like Stone Fox Capital) claim that the assets (those on and off the balance sheet) are so valuable that the stock is very cheap. Who is right? In situations like this its key to research the involvement of bigger investors. Would you short a stock that Buffet is buying or buy a stock that Buffett is selling?

The main investors in SHLD are Eddie Lampert whose ESL hedge fund via RBS Partners owns a whopping 57% or 66M shares and Bruce Berkowitz's Fairholme Funds that owns 13% or 15M shares. It is the 2nd largest holding in his fund. The fund has done so well that Berkowitz was just named the Morningstar Domestic Fund Manager of the Year. Both are guys that investors should be happy to invest along side. Ironically though SHLD has a ton of shorts.

In the below interview on CNBC today, Bruce was gleaming from ear to ear on his SHLD investment. Today they announced guidance that doubled the estimates for the year ending in January. Also, notable was that SHLD had positive comps for December and KMart had a strong 5% number. No wonder he was beaming with the timing of this interview being nearly perfectly orchestrated.

Its difficult to see the point of the shorts. SHLD has assets such as the commercial real estate and brands like Diehard and Kenmore that far surpass the current $11B market cap. Not to mention SHLD has roughly $7B in net inventory (cash + inventory - debt) making it a deep value play. It's easy to ponder up valuations in the $20, 30 and even 40B range on this stock, but the point of this article is to follow the steps of the genius investors that continue to pile into this stock. Let them guide you if you don't have a gigantic research department.

Eddie just announced last month $500M more stock to be bought by SHLD which at some point will leave the public float next to nothing as Eddie and Bruce squeeze every last short. The float could technically be next to zero depending on whether some large mutual funds hold onto their shares, but just assuming what Eddie and Bruce control the float is only 30M. On Dec 15th, the short level was 14.4M shares meaning that 50% of the float is short. All while Eddie is buying up shares on a daily basis (5.8M more planned at these stock prices). The simple math doesn't add up for the short story. At some point, people are going to be short with no willing sellers.

Be careful buying at these levels as today opened a huge gap in the charts. SHLD is going higher ultimately, but a lot of stocks eventually fill gaps so load up if it does around $90.


Mark said…
Bruce is 100% opposite investor from me, but he rocks.

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