SHLDQ - Sears Holdings Corp

[alertmeipp]

So the consensus here now is shld is going under?

 

[alpha asset strategies]

So the consensus here now is shld is going under?

 

That's been my consensus for the past year or so.  I've got a large portion of my portfolio betting on it.

[walt373]

So the consensus here now is shld is going under?

 

Pretty sure that is the consensus among bulls as well. They are just more optimistic on time frame and asset values.

[paperwerks]

<<So the consensus here now is shld is going under>>

 

This seems impossible because:

 

1.) the real estate is worth $250 per share

 

2.) the losses are optional.

 

3.) Eddie Lampert is an investing genius. Bruce Berkowitz needs no introduction either. You are investing alongside two investing geniuses = investing genius squared!

 

4.) if the retail turnaround works SHLD is a grandslam. If it doesn't work it will still be a homerun.

 

5.) Bankruptcy remote subsidiaries. Need I say more?.....

 

6.) in the worst case scenario, the money losing retail operations can be spun off along with the debt and pension liability. Leaving the real estate for the common shareholders.

 

7.) Eddie has a secret plan. He can't talk about it but it involves Amazon needing 1000 retail locations! OMG! the Mother of all short squeezes!

[scorpioncapital]

sears reminds me of a good-bank, bad-bank, the Sears retail operation is like the bad-bank, but the real estate (e.g. Seritage and what's left in Sears) and the brands are the good-bank. The question is how they will jettison the bad part - and I believe their strategy is to just become a sort of Internet mail-order operation, however, I get the sense they are doing it slowly and perhaps are even reticent to get rid of the physical stores very fast. Perhaps their hand will be forced, already I see more and more articles about Sears stores closing and restructuring.

[dyow]

So the consensus here now is shld is going under?

 

That's been my consensus for the past year or so.  I've got a large portion of my portfolio betting on it.

 

What is your thesis and how did you come to that conclusion?  Did you actually run numbers or is there a qualitative trigger that makes it go under.

 

And yes sears sucks and their brand has been severely damaged and they can't stop burning cash.

 

But the bulls say the stock is worth $150 now, in net liquidation value.  they burned through $15 a share last year.  They could go on for say another 7 years doing this, and liquidate the whole business at the end of year 7.  And there would be $45 left in the company to pay to shareholders and this would give you a margin of safety for the stock bought at today's price.

 

So if you are short the stock how would you (or anybody else on this board) counter this argument?

 

I have no position/or view on this stock btw.  At least not yet. 

 

[Gregmal]

So the consensus here now is shld is going under?

 

That's been my consensus for the past year or so.  I've got a large portion of my portfolio betting on it.

 

What is your thesis and how did you come to that conclusion?  Did you actually run numbers or is there a qualitative trigger that makes it go under.

 

And yes sears sucks and their brand has been severely damaged and they can't stop burning cash.

 

But the bulls say the stock is worth $150 now, in net liquidation value.  they burned through $15 a share last year.  They could go on for say another 7 years doing this, and liquidate the whole business at the end of year 7.  And there would be $45 left in the company to pay to shareholders and this would give you a margin of safety for the stock bought at today's price.

 

So if you are short the stock how would you (or anybody else on this board) counter this argument?

 

I have no position/or view on this stock btw.  At least not yet.

 

No position, but as a long time fan of the SHLD story, at this point it's done. Sears just may have been the best trading stock I've ever come across from 2011-early 2015. Any mention of the RE and a solid tout from Berkowitz, an insider buy from Lampert, or presentation from Baker Street, would give you a 40-50% return in weeks. But the business is done, and by and large IMO the assets have been either spun out, or used as collateral to fund future money losing ventures. Lampert has also used to hedge fund to secure claim to many pieces in rather unconventional, and IMO rather anti-shareholder ways. Once SRG was spun out, I decided that was it.

 

Very simply, if the remaining assets are worth $150 net of debt, this wouldn't be trading at $8. Maybe you've got some upside, but its also hard to quantify 3-5 years minimum of bankruptcy proceedings, lawyer fees, and liquidations.

[BTShine]

Gregmal,

 

You may be correct.  But, the current trading price of a stock does not equal the true value of the stock.  See GGP and its pre through post bankruptcy stock price.  Some people made big returns from that phenomenon of a huge price/value differential and that situation  will happen again in the future.  If only I had bought more when GGP was $1.50 a share.

[walt373]

GGP was a good buy after it crashed, not before. It went from $28 to under $1 in about 2 months during a market panic. SHLD is gradually eroding away during a bull market. Very different situations.

[Gregmal]

Gregmal,

 

You may be correct.  But, the current trading price of a stock does not equal the true value of the stock.  See GGP and its pre through post bankruptcy stock price.  Some people made big returns from that phenomenon of a huge price/value differential and that situation  will happen again in the future.  If only I had bought more when GGP was $1.50 a share.

 

As the guy below mentioned, GGP unfolded in short order. Sears has been under the microscope for over a decade and been analyzed by the best Wall Street has to offer. The odds there is a $142 per share valuation gap is just a little too farfetched. These are retail and real estate assets, which arent terribly difficult to assign a valuation range to.

[alpha asset strategies]

I wholeheartedly agree that SHLD was an asset-rich entity 10 years ago - even 5 years ago.  However, after spinning off / selling numerous valuable assets in addition to the retail operations burning $1 to $2 billion per year in operating losses for the past few years, I'm more than willing to make a substantial bet that the equity is toast.  Unfortunately, SHLD is not an easy short due to the high borrow costs, potential for short squeezes, etc.

[dyow]

Gregmal,

 

I can see why you and others would not trust the $150 figure.  But I would disagree on your point that wall street street would have figured it out if this was in fact worth $150.  No analyst on wall street would recommend buying this stock bc they would get fired the next day.  Also Lampost and Berk own 80% of the shares so there is no room for another investor who thinks its cheap ,like say Icahn, to come in and buy a big stake and change direction. 

 

Buying sears could have been a terrible buy at $40, but if it continues dropping at some price point it may be a good bet, and the probabilities might be on your side.   

 

That said, I see the trap here.

 

- You have two controlling shareholders, who seem emotionally invested and haven't clearly articulated what their plans are, who were buying at much higher prices and their need to make a profit on this investment may very well be destroying shareholder value. 

- There is no clear cut catalyst.

 

These elements make this more a net-net type speculation play than an investment. 

 

Nothing i am saying here is new and has prob mentioned several times before, i am just late to the party, i just can't help myself from getting interested as the stock price tanks...but ultimately i may very well pass.     

 

Thanks for the feedback.

[walt373]

Buying sears could have been a terrible buy at $40, but if it continues dropping at some price point it may be a good bet, and the probabilities might be on your side.

 

I could see this get interesting if they file for bankruptcy and the price crashes due to forced selling. At that point, a GGP comparison might be more apt.

[BTShine]

This is not GGP.  Very different assets and financial structure here.  The point I tried to make is that stock price does not equal intrinsic value.

[wisdom]

Does the Tisch family (trusts and personally) still own 4 million or so shares?

 

If they still do, the float out there is much smaller than most realize.

[Gregmal]

Another thing I think any long should look at, or at least be aware of, is the concentrated ownership at significantly higher cost basis creates a potentially massive conflict of interest. If the stock really is worth $150, why wouldn't Lampert want to take this out at as low a price as possible? Or draw this into a bankruptcy situation in which the liens his other entities already have on certain assets benefit?

[walt373]

Whos going to force sell? ~85% is controlled by 2 guys. Both of which are on the BOD.

 

Some index funds own this. I see Vanguard, State Street, and Blackrock among the holders. I think the small float could magnify price moves from forced selling. If you assume Eddie/Bruce aren't going to be buying or selling, their shares aren't going to have an impact on the market.

[zarley]

Any discussion of SHLD without touching on their liabilities and potential near-term liquidity problems is deeply flawed. 

 

I have owned SHLD off and on since 2008.  I no longer own it because ESL's moves to spin off valuable parts while continuing to add debt to the parent company, while continuing to lose fistfuls of money in the retail operation, leave the overall value picture very murky.

 

SHLD has spun off valuable assets over the past few years, with ESL taking up their share (and more) of those pieces.  What does this mean to ESL's commitment to SHLD common?  Has he gotten his "principle" out by getting pieces of Lands End, SHOS, Sears Canada, etc.?

 

ESL has been willing to provide short-term liquidity to SHLD to keep the lights on -- currently in the neighborhood of $450 million in commercial paper and the 2017 secured loan facility.  What happens if ESL shuts off that flow of money?

 

Given the amount of short and long-term SHLD debt that ESL owns, how badly hurt do they get If the SHLD common goes to zero?

 

SHLD common has negative equity to the tune of $4billion.  You have to figure the assets are under-stated by more than that amount, or the liabilities to be over-stated by that amount, to give the equity any value at all.  Which of the assets are undervalued by $4-5 billion?  Are you sure it's the real estate?  If there's a liquidity problem, does that help much?  In my gut, I worry that ESL may be positioned well enough that a strategic default in SHLD won't hurt him much.

 

A smart and diligent investor may be able to put the pieces together and get comfortable with the overall picture.  Given my own limitations, I know I am not that guy.  So, I no longer own SHLD.  When we see how the cash-burn was for Christmas 2016 and the Secured Loan Facility comes up in mid-2017, we may get some hint about the future of SHLD.  Until then, I know that I have no idea if the SHLD common is a dead-man walking. 

[dyow]

Another thing I think any long should look at, or at least be aware of, is the concentrated ownership at significantly higher cost basis creates a potentially massive conflict of interest. If the stock really is worth $150, why wouldn't Lampert want to take this out at as low a price as possible? Or draw this into a bankruptcy situation in which the liens his other entities already have on certain assets benefit?

 

Good points.  I don't think he can buyout the remaining stake at any price he wants, the bk issue a valid point.

[dyow]

Any discussion of SHLD without touching on their liabilities and potential near-term liquidity problems is deeply flawed. 

 

I have owned SHLD off and on since 2008.  I no longer own it because ESL's moves to spin off valuable parts while continuing to add debt to the parent company, while continuing to lose fistfuls of money in the retail operation, leave the overall value picture very murky.

 

SHLD has spun off valuable assets over the past few years, with ESL taking up their share (and more) of those pieces.  What does this mean to ESL's commitment to SHLD common?  Has he gotten his "principle" out by getting pieces of Lands End, SHOS, Sears Canada, etc.?

 

ESL has been willing to provide short-term liquidity to SHLD to keep the lights on -- currently in the neighborhood of $450 million in commercial paper and the 2017 secured loan facility.  What happens if ESL shuts off that flow of money?

 

Given the amount of short and long-term SHLD debt that ESL owns, how badly hurt do they get If the SHLD common goes to zero?

 

SHLD common has negative equity to the tune of $4billion.  You have to figure the assets are under-stated by more than that amount, or the liabilities to be over-stated by that amount, to give the equity any value at all.  Which of the assets are undervalued by $4-5 billion?  Are you sure it's the real estate?  If there's a liquidity problem, does that help much?  In my gut, I worry that ESL may be positioned well enough that a strategic default in SHLD won't hurt him much.

 

A smart and diligent investor may be able to put the pieces together and get comfortable with the overall picture.  Given my own limitations, I know I am not that guy.  So, I no longer own SHLD.  When we see how the cash-burn was for Christmas 2016 and the Secured Loan Facility comes up in mid-2017, we may get some hint about the future of SHLD.  Until then, I know that I have no idea if the SHLD common is a dead-man walking.

 

You make very valid points.  I haven't looked at this - short term liquidity issue could very well trigger something bad, i was leaning towards thinking some of their assets are liquid enough where that liquidity would not be a short term issue (but i could be incredibly wrong).  I would have to look at this in detail to get a better idea.

 

If ESL allowed it to go down, how about Bruce? does he have a proportional ownership of debt in comparison to the 25% of equity he owns? Again something i have to look at.

 

I would not look at the negative equity on the balance sheet, it doesn't tell us anything new.  But yes figuring out what the real values are is a big component of this.

 

[doughishere]

Buying sears could have been a terrible buy at $40, but if it continues dropping at some price point it may be a good bet, and the probabilities might be on your side.

 

I could see this get interesting if they file for bankruptcy and the price crashes due to forced selling. At that point, a GGP comparison might be more apt.

 

Whos going to force sell? ~85% is controlled by 2 guys. Both of which are on the BOD.

Berko, due redemptions.

 

Maybe but to be fair how many people are still in his fund that don't want to ride it out.

[scorpioncapital]

Didn't Gates Cascades investments invest in Sears debt? Perhaps they are gamblers and are willing to throw the dice but I'm not sure that is their central expectation. But of course they could be very wrong as sometimes happens, remember Buffett and Allied Irish?

[doughishere]

https://www.entrepreneur.com/article/189706

 

“Once, I asked Eddie, ‘What is it that you want? To be the richest? To compound money at the highest rates?’” recalls Pike, who worked as an analyst at Lampert’s hedge fund before striking out on his own.

 

 

 

Dated JANUARY 1, 2008

[alpha asset strategies]

Didn't Gates Cascades investments invest in Sears debt? Perhaps they are gamblers and are willing to throw the dice but I'm not sure that is their central expectation. But of course they could be very wrong as sometimes happens, remember Buffett and Allied Irish?

 

Gates' / Cascade Investments & ESL's $500mm loan is a first mortgage on 20+ properties.  The 20+ properties that secure this loan are reportedly the most prized real estate assets remaining in SHLD, including corporate headquarters, South Coast Plaza, etc.  That loan is over-collateralized; regardless of what happens, Cascade & ESL won't lose a dime on that loan.

[Marve2013]

Excellent article!  thanks, Doughishere !