SHLDQ - Sears Holdings Corp

[wisdom]

option B

 

How much downside do you see? Do you think SHLD is going to be bankrupt? What is the value in bankruptcy?

 

Most people value the assets north of $20B.

 

So the upside is 4x and downside is limited - at least that is how I see it. How do I spell margin of safety.

 

At the sametime, you have an excellent capital allocator running the show with most of his money in SHLD. He is in it for the long term unlike most of the herd that would choose option C.

 

All this buys me more time to keep building a position.

[texual]

I wonder what will end up happening over time, it appears the buyback has completely ended. In place the two biggest owners are just buying up the shares and hoarding them for themselves. ESL has effectively bought what he would have done with the company buyback. I doubt he sells his own shares ever, and that means the float keeps going down even if the buyback is finished. I'd love to see how many shares are left outstanding if you remove all the long term owners.

 

That still isn't an excuse or reason to buy shares of SHLD. This was a stupid investment for me when I got interested years ago. Nothing good came of it so I wouldn't recommend anyone listen to me about this company. However there is something to be said for the two men that own the shares, both excellent investors, and thinkers. There is also ESL and his personal stake. Maybe he is really insane but from everything he writes and says I don't think he is - and buying more stock of the company is a strong insider buy to me. I don't know what he is doing as CEO but I am waiting and watching.

[constructive]

The fact that most investors choose "C" is more reason for one to choose "A" or "B."

 

The fact that most people don't own shares of SHLD is weak evidence that it's underpriced.

 

"A" is obviously worth less than $5B. If Sears, a company which specializes in selling Sears merchandise, can't do it at a profit, what hope would anyone else have?

 

"B" remains to be seen.

[Parsad]

I wonder what will end up happening over time, it appears the buyback has completely ended. In place the two biggest owners are just buying up the shares and hoarding them for themselves. ESL has effectively bought what he would have done with the company buyback. I doubt he sells his own shares ever, and that means the float keeps going down even if the buyback is finished. I'd love to see how many shares are left outstanding if you remove all the long term owners.

 

That still isn't an excuse or reason to buy shares of SHLD. This was a stupid investment for me when I got interested years ago. Nothing good came of it so I wouldn't recommend anyone listen to me about this company. However there is something to be said for the two men that own the shares, both excellent investors, and thinkers. There is also ESL and his personal stake. Maybe he is really insane but from everything he writes and says I don't think he is - and buying more stock of the company is a strong insider buy to me. I don't know what he is doing as CEO but I am waiting and watching.

 

You were early, and he was too damn slow.  Things may be different now.  Cheers!

[zarley]

Most people value the assets north of $20B.

 

What do most people value the liabilities at? Sears values them at around $17 billion, and equity around $2.5 billion. 

 

What were you saying about 4x upside?

 

 

[matjone]

You were early, and he was too damn slow.  Things may be different now.  Cheers!

 

So do we take this to mean you are long SHLD now?

[Guest hellsten]

Another positive thing about SHLD is that short interest has been rising steadily from 7-8 million to over 13 million:

http://www.nasdaq.com/symbol/shld/short-interest

 

53.28% of float is short ??? Good luck, you will need it…

 

I'm wondering if I should take a full position before or after the results are released. I guess the results will be bad, but I have no idea of how the market will react. I can wait 5-10 years for this to pan out, so I'm probably not going to "suck my thumb".

[abitofvalue]

Another positive thing about SHLD is that short interest has been rising steadily from 7-8 million to over 13 million:

http://www.nasdaq.com/symbol/shld/short-interest

 

53.28% of float is short ??? Good luck, you will need it…

 

I'm wondering if I should take a full position before or after the results are released. I guess the results will be bad, but I have no idea of how the market will react. I can wait 5-10 years for this to pan out, so I'm probably not going to "suck my thumb".

 

short interest has spiked to 19 days to cover according to the Nasdaq website.  wonder if ESL, Fairholm, Tisch allow their shares to be lent. Probably do, since they can get some income on the short while continuing to buy shares at cheaper prices.  Would be quite the short squeeze if a large holder suddenly decided they don't want to allow their shares to be out on borrow and recalled them on short notice.  How does that work anyway? Surely anyone shorting is going to have an agreement with their brokers to have the borrow for a decent amount of time.. any of the fund managers have any ideas?

 

p.s. - i don't expect a short squeeze or anything of the sort here, just let my mind wander and didn't really know the answer so thought would pose it for the more experienced members of the board.

[Guest hellsten]

Anyone here have any more information about Force Capital, and the SHLD call options they own?

 

A quick Google returns this:

Our firm has the primary objective of: “Finding mispriced and misunderstood businesses with a catalyst that we believe will enable the public markets to recognize the business's true value.”  As such, we consider ourselves value-oriented, catalyst-driven investors.

http://forcecapital.com/about/

 

And this filing:

http://www.sec.gov/Archives/edgar/data/1317601/000131760113000004/a201303-13f_hr.txt

 

They own 4,124,200 call options, so they are speculating that there's a catalyst here. They also own a lot of BAC options…

 

I guess the options are attractive. They don't cost much, so it's probably the cheapest way of speculating on SHLD's future.

[stahleyp]

Anyone here have any more information about Force Capital, and the SHLD call options they own?

 

A quick Google returns this:

Our firm has the primary objective of: “Finding mispriced and misunderstood businesses with a catalyst that we believe will enable the public markets to recognize the business's true value.”  As such, we consider ourselves value-oriented, catalyst-driven investors.

http://forcecapital.com/about/

 

And this filing:

http://www.sec.gov/Archives/edgar/data/1317601/000131760113000004/a201303-13f_hr.txt

 

They own 4,124,200 call options, so they are speculating that there's a catalyst here. They also own a lot of BAC options…

 

I guess the options are attractive. They don't cost much, so it's probably the cheapest way of speculating on SHLD's future.

 

This was posted earlier in the thread.

 

http://seekingalpha.com/article/1509142-sears-holdings-valuation-between-berkshire-hathaway-and-bankruptcy

 

Near the end there is a piece titled "Timeframe for Greater Price Volatility". It goes into a bit of details about options there.

[ItsAValueTrap]

Would be quite the short squeeze if a large holder suddenly decided they don't want to allow their shares to be out on borrow and recalled them on short notice.  How does that work anyway? Surely anyone shorting is going to have an agreement with their brokers to have the borrow for a decent amount of time.. any of the fund managers have any ideas?

 

Read the transcript of Marc Cohodes' transcript here:

http://www.nytimes.com/2012/03/26/business/goldman-sachs-denies-claims-it-led-to-copper-rivers-demise.html?pagewanted=all&_r=0

 

(Yeah yeah, Cohodes shorted Overstock and Fairfax.)

 

The short sellers can do the following trick:

Suppose they only really want to short 100 shares.

They will short 200 shares in margin account A.

They will go LONG 100 shares in cash account B.  They will allow their broker to lend these shares out.  This long position will show up in 13-F filings while the short position won't.  (A lot of managers shorting Interoil/IOC probably have long positions reported on their 13-Fs.)

The net exposure is only 100 shares.

 

If they have to return 100 shares, then they will cover in account A.  In account B, they will sell their long position.

 

2- Certain securities let them lock in their borrow so that they can't get bought in.

 

3- Some hedge funds out there make a sport of engineering buy-ins.  (This may be considered market manipulation and could be considered to be illegal.)  It happened to Jim Cramer, and then Jim Cramer started doing it to other people.

[prunes]

What's the point? Why not just short the 100?

[siddharth18]

Would be quite the short squeeze if a large holder suddenly decided they don't want to allow their shares to be out on borrow and recalled them on short notice.  How does that work anyway? Surely anyone shorting is going to have an agreement with their brokers to have the borrow for a decent amount of time.. any of the fund managers have any ideas?

 

Read the transcript of Marc Cohodes' transcript here:

http://www.nytimes.com/2012/03/26/business/goldman-sachs-denies-claims-it-led-to-copper-rivers-demise.html?pagewanted=all&_r=0

 

(Yeah yeah, Cohodes shorted Overstock and Fairfax.)

 

The short sellers can do the following trick:

Suppose they only really want to short 100 shares.

They will short 200 shares in margin account A.

They will go LONG 100 shares in cash account B.  They will allow their broker to lend these shares out.  This long position will show up in 13-F filings while the short position won't.  (A lot of managers shorting Interoil/IOC probably have long positions reported on their 13-Fs.)

The net exposure is only 100 shares.

 

If they have to return 100 shares, then they will cover in account A.  In account B, they will sell their long position.

 

2- Certain securities let them lock in their borrow so that they can't get bought in.

 

3- Some hedge funds out there make a sport of engineering buy-ins.  (This may be considered market manipulation and could be considered to be illegal.)  It happened to Jim Cramer, and then Jim Cramer started doing it to other people.

 

Can you please elaborate on this? I'd like to know this too. Why is shorting 200 and going long 100, better than just shorting 100?

[ItsAValueTrap]

The shares have to be borrowed.

 

Other brokers will lend out their clients' shares.  (Sometimes with their knowledge, sometimes without.)  When that person decides to sell their shares, the short seller's broker has to locate new shares to borrow within a specified timeframe.  If that doesn't happen, then the short seller's shares must be bought in.

Because sometimes it is hard to locate shares on short notice, then it can make sense to borrow more shares than you need.  So, if you get bought in on a portion of the shares, then you still have your borrow and aren't forced into a buy-in situation.

[Parsad]

You were early, and he was too damn slow.  Things may be different now.  Cheers!

 

So do we take this to mean you are long SHLD now?

 

No comment.  Cheers!

[Luke 532]

 

"A" is obviously worth less than $5B. If Sears, a company which specializes in selling Sears merchandise, can't do it at a profit, what hope would anyone else have?

 

(1) From http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/60/

"I have heard over the years that inventory isn't a useful number because in a liquidation you can't get full price.... However, inventory is held on the books at the lower of cost or market.

 

If you go back to the conference call last Feb, Lou'D, the CEO, said that even when closing stores, they "ALWAYS ARE ABLE TO SELL INVENTORY FOR MORE THAN THEY PAID FOR IT"

 

So, knowing those two pieces of information, I'd say it's reasonable to assume the inventory is worth what the books say it's worth... and if that's the case, then you could buy the entire company for less dollars than you could buy all of their washers/dryers/ fridges/ socks/ jewelery, etc.... And if that's the case, then assuming the retail business is capable of funding the pension as they wind it down, the real estate is all gravy."

 

(2) From CC MAY 2013…

Lampert: "$4B-$5B inventory with no payables against them."

 

(3) From http://finance.fortune.cnn.com/2012/11/26/bruce-berkowitz-fairholme/

Berkowitz: "How can Sears close stores and generate hundreds of millions of dollars of cash? It gets at the inventory. The liquidation value of its inventory approaches its stock price. Forget the real estate."

 

(4) From http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/690/

"Sears having $45 per share (at cost) of owned inventory."

 

(5) From http://seekingalpha.com/article/1509142-sears-holdings-valuation-between-berkshire-hathaway-and-bankruptcy?source=email_rt_article_title

"Lampert further explains in his letter that the cash generated by liquidation of net inventory - free of obligations - at these locations typically covers and exceeds severance pay and all other costs related to closing the stores."

 

[constructive]

If you go back to the conference call last Feb, Lou'D, the CEO, said that even when closing stores, they "ALWAYS ARE ABLE TO SELL INVENTORY FOR MORE THAN THEY PAID FOR IT"

 

Meaning that gross margins are positive but net margins are negative. Of course, it's common sense that gross margins and net margins are worse when liquidating a store than when running it as a going concern.

 

Inventory isn't worth face value unless it's sellable at a net profit.

 

(3) From http://finance.fortune.cnn.com/2012/11/26/bruce-berkowitz-fairholme/

Berkowitz: "How can Sears close stores and generate hundreds of millions of dollars of cash? It gets at the inventory. The liquidation value of its inventory approaches its stock price. Forget the real estate."

 

This statement is misleading. They have not generated hundreds of millions of dollars of cash from inventory liquidation. That was from selling the Hawaiian flagship property for $250M. Typical stores are more like $2.5M of real estate and $2.5M of inventory, minus closing costs. Of course, the level of disclosure is minimal.

 

(5) From http://seekingalpha.com/article/1509142-sears-holdings-valuation-between-berkshire-hathaway-and-bankruptcy?source=email_rt_article_title

"Lampert further explains in his letter that the cash generated by liquidation of net inventory - free of obligations - at these locations typically covers and exceeds severance pay and all other costs related to closing the stores."

 

OK, cash flow from store closure is usually positive. But store closures aren't profitable unless the real estate is carried well below market price.

 

Imagine a store on the balance sheet at $4M, liquidated for $5M, with closing costs of $3M. That would be cash flow of +$2M but earnings of -$2M.

[Luke 532]

Inventory isn't worth face value unless it's sellable at a net profit.

 

D'Ambrosio claimed it was/is.

 

This statement is misleading. They have not generated hundreds of millions of dollars of cash from inventory liquidation. That was from selling the Hawaiian flagship property for $250M. Typical stores are more like $2.5M of real estate and $2.5M of inventory, minus closing costs. Of course, the level of disclosure is minimal.

 

Berkowitz isn't arguing that EVERY store generates hundreds of millions, but rather that collectively that is what they get in cash.

 

OK, cash flow from store closure is usually positive. But store closures aren't profitable unless the real estate is carried well below market price.

 

Imagine a store on the balance sheet at $4M, liquidated for $5M, with closing costs of $3M. That would be cash flow of +$2M but earnings of -$2M.

 

I would say it's a fairly safe assumption that the value of the real estate on the books is far less than today's market prices... and that will likely only improve as the economy continues to strengthen.

 

We can imagine with those numbers you provided all we want, but Lampert himself has stated that the reality is (paraphrased, not a direct quote from Lampert) "that the cash generated by liquidation of net inventory - free of obligations - at these locations typically covers and exceeds severance pay and all other costs related to closing the stores. When stores are sold or re-leased to a new tenant, the corresponding liabilities are likewise removed from the Sears Holdings balance sheet and a net gain or loss over the amounts at which they were carried according to GAAP rules can be realized."

[matts]

Another positive thing about SHLD is that short interest has been rising steadily from 7-8 million to over 13 million:

http://www.nasdaq.com/symbol/shld/short-interest

 

53.28% of float is short ??? Good luck, you will need it…

 

I'm wondering if I should take a full position before or after the results are released. I guess the results will be bad, but I have no idea of how the market will react. I can wait 5-10 years for this to pan out, so I'm probably not going to "suck my thumb".

 

short interest has spiked to 19 days to cover according to the Nasdaq website.  wonder if ESL, Fairholm, Tisch allow their shares to be lent. Probably do, since they can get some income on the short while continuing to buy shares at cheaper prices.  Would be quite the short squeeze if a large holder suddenly decided they don't want to allow their shares to be out on borrow and recalled them on short notice.  How does that work anyway? Surely anyone shorting is going to have an agreement with their brokers to have the borrow for a decent amount of time.. any of the fund managers have any ideas?

 

p.s. - i don't expect a short squeeze or anything of the sort here, just let my mind wander and didn't really know the answer so thought would pose it for the more experienced members of the board.

 

I work at one of the major prime brokers so I can try to answer your question. The vast majority of the time, the shares primes lend to hedge funds are "callable on demand" because whoever the original owner of the shares was, lent the shares to the broker also "callable on demand." When the owner recalls his shares from the broker, the broker has a 3 day settlement period to return the shares.  Please note that the owner doesn't need to sell his shares to demand a recall, he can just decide it. Now the prime doesn't want to piss off its client hedge fund, so it will go into the market and try to borrow the shares somewhere else to make the owner whole. However, if no other shares are available, the hedge fund is shit out of luck and the prime demands the short be closed and stock returned. Guaranteed or "locked up" shares for long periods of time are very rare in the industry. Now in practice there is rarely no borrow, it's more like the borrowing cost goes from 5% to 35% so that quickly shakes most of the shorters out, creating a short squeeze.

 

So it's possible, but like you said, ESL doesn't mind the low price if he is buying more, and if the borrowing rates spike, he will definitely want to collect 35% annual "income" on his long term position. Also, he can only make the no lend decision once, because if he turns it on and off repeatedly just to "shake" shorters he can be accused of market manipulation.

 

Hope that helps.

[compoundinglife]

Another positive thing about SHLD is that short interest has been rising steadily from 7-8 million to over 13 million:

http://www.nasdaq.com/symbol/shld/short-interest

 

53.28% of float is short ??? Good luck, you will need it…

 

I'm wondering if I should take a full position before or after the results are released. I guess the results will be bad, but I have no idea of how the market will react. I can wait 5-10 years for this to pan out, so I'm probably not going to "suck my thumb".

 

short interest has spiked to 19 days to cover according to the Nasdaq website.  wonder if ESL, Fairholm, Tisch allow their shares to be lent. Probably do, since they can get some income on the short while continuing to buy shares at cheaper prices.  Would be quite the short squeeze if a large holder suddenly decided they don't want to allow their shares to be out on borrow and recalled them on short notice.  How does that work anyway? Surely anyone shorting is going to have an agreement with their brokers to have the borrow for a decent amount of time.. any of the fund managers have any ideas?

 

p.s. - i don't expect a short squeeze or anything of the sort here, just let my mind wander and didn't really know the answer so thought would pose it for the more experienced members of the board.

 

I work at one of the major prime brokers so I can try to answer your question. The vast majority of the time, the shares primes lend to hedge funds are "callable on demand" because whoever the original owner of the shares was, lent the shares to the broker also "callable on demand." When the owner recalls his shares from the broker, the broker has a 3 day settlement period to return the shares.  Please note that the owner doesn't need to sell his shares to demand a recall, he can just decide it. Now the prime doesn't want to piss off its client hedge fund, so it will go into the market and try to borrow the shares somewhere else to make the owner whole. However, if no other shares are available, the hedge fund is shit out of luck and the prime demands the short be closed and stock returned. Guaranteed or "locked up" shares for long periods of time are very rare in the industry. Now in practice there is rarely no borrow, it's more like the borrowing cost goes from 5% to 35% so that quickly shakes most of the shorters out, creating a short squeeze.

 

So it's possible, but like you said, ESL doesn't mind the low price if he is buying more, and if the borrowing rates spike, he will definitely want to collect 35% annual "income" on his long term position. Also, he can only make the no lend decision once, because if he turns it on and off repeatedly just to "shake" shorters he can be accused of market manipulation.

 

Hope that helps.

 

Unfortunately I can't find any references at the moment, but I am fairly certain ESL does not lend out his SHLD stock as is evidenced by the high borrowing costs.

[Buckeye]

 

 

I work at one of the major prime brokers so I can try to answer your question. The vast majority of the time, the shares primes lend to hedge funds are "callable on demand" because whoever the original owner of the shares was, lent the shares to the broker also "callable on demand." When the owner recalls his shares from the broker, the broker has a 3 day settlement period to return the shares.  Please note that the owner doesn't need to sell his shares to demand a recall, he can just decide it. Now the prime doesn't want to piss off its client hedge fund, so it will go into the market and try to borrow the shares somewhere else to make the owner whole. However, if no other shares are available, the hedge fund is shit out of luck and the prime demands the short be closed and stock returned. Guaranteed or "locked up" shares for long periods of time are very rare in the industry. Now in practice there is rarely no borrow, it's more like the borrowing cost goes from 5% to 35% so that quickly shakes most of the shorters out, creating a short squeeze.

 

So it's possible, but like you said, ESL doesn't mind the low price if he is buying more, and if the borrowing rates spike, he will definitely want to collect 35% annual "income" on his long term position. Also, he can only make the no lend decision once, because if he turns it on and off repeatedly just to "shake" shorters he can be accused of market manipulation.

 

Hope that helps.

 

Cool.  Thanks for the mini lesson Matts!  I wasn't sure how that all worked out behind the scenes.

 

 

[ItsAValueTrap]

Unfortunately I can't find any references at the moment, but I am fairly certain ESL does not lend out his SHLD stock as is evidenced by the high borrowing costs.

 

I think he has a fiduciary duty to lend his shares out.  It's almost like free money.  I'd be very surprised if he wasn't lending out his shares.

 

Why there is some risk to lending out your shares:

There is a small risk to using a margin account instead of using a cash account.  In theory, the whole stock market system could implode if some broker can't meet its obligations.  Suppose clearing company A and clearing company B have to clear all the trades made by their clients.  The trades are made beforehand and don't settle right away.  It's theoretically possible that some trader makes trade that they can't possibly pay for.  They're on margin and they have a huge mark to market loss that causes their account to go negative (e.g. like Buffett's sister selling put options).  If that happens, then the broker has to close out that client's account and eat the loss (and Buffett made his sister do that, to punish the broker for encouraging her to do inappropriate trades).  If the broker can't eat the loss, then the clearing company has to eat the loss.  If the clearing company can't do that, then the whole system breaks down and the loss will end up somewhere.

 

In practice, I think that the chance of this happening is extremely remote.

 

Guaranteed or "locked up" shares for long periods of time are very rare in the industry.

Well let me clarify.  There are various instruments that you can use to "lock in" a borrow:

 

a- Put options.  The use of put options is extremely common among short sellers.  Obviously, options are different than common stock.  You are also betting on volatility, interest rates, etc.

b- Any of the other instruments mentioned in Marc Cohodes' deposition.  Things like forward contracts, agreements to borrow shares for a specified period of time, etc.  I think those things are rare.

[matts]

 

 

Unfortunately I can't find any references at the moment, but I am fairly certain ESL does not lend out his SHLD stock as is evidenced by the high borrowing costs.

 

Well then I think he is silly. Because he should not care if he's a long term holder but he could be picking up some great "yield".

 

[compoundinglife]

Unfortunately I can't find any references at the moment, but I am fairly certain ESL does not lend out his SHLD stock as is evidenced by the high borrowing costs.

 

I think he has a fiduciary duty to lend his shares out.  It's almost like free money.  I'd be very surprised if he wasn't lending out his shares.

 

Why there is some risk to lending out your shares:

There is a small risk to using a margin account instead of using a cash account.  In theory, the whole stock market system could implode if some broker can't meet its obligations.  Suppose clearing company A and clearing company B have to clear all the trades made by their clients.  The trades are made beforehand and don't settle right away.  It's theoretically possible that some trader makes trade that they can't possibly pay for.  They're on margin and they have a huge mark to market loss that causes their account to go negative (e.g. like Buffett's sister selling put options).  If that happens, then the broker has to close out that client's account and eat the loss (and Buffett made his sister do that, to punish the broker for encouraging her to do inappropriate trades).  If the broker can't eat the loss, then the clearing company has to eat the loss.  If the clearing company can't do that, then the whole system breaks down and the loss will end up somewhere.

 

In practice, I think that the chance of this happening is extremely remote.

 

Guaranteed or "locked up" shares for long periods of time are very rare in the industry.

Well let me clarify.  There are various instruments that you can use to "lock in" a borrow:

 

a- Put options.  The use of put options is extremely common among short sellers.  Obviously, options are different than common stock.  You are also betting on volatility, interest rates, etc.

b- Any of the other instruments mentioned in Marc Cohodes' deposition.  Things like forward contracts, agreements to borrow shares for a specified period of time, etc.  I think those things are rare.

 

Thanks for the reply ValueTrap. I agree that it seems crazy not to lend the shares with the borrow premium being so high. I am merely recounting what I read in the past. I will look for the source so I can cite it. I would appreciate in the future if you quote multiple posters if you could indicate that with the authors name in the quote.

[ItsAValueTrap]

I would appreciate in the future if you quote multiple posters if you could indicate that with the authors name in the quote.

My apologies.