SHLDQ - Sears Holdings Corp

[alertmeipp]

 

I think people forget that is it the job of both Lampert and Berkowitz to do what is in the best interest of their investors.  If the share price drops low enough, I don't know what protection there is for the small investors outside those funds.

 

Actually NO.  Please refer to Martin Whiteman's  recent book "Modern Security Analysis", Chapter 12, "The Significance (or Lack of Significance) of Market Performance".

 

For the control shareholders (like Lampert and Berkowitz), their timeline is different than the outside passive minority investors (OPMI). Market prices are considerably less important to the control shareholders than to the OPMI. The control sharesholder (true owners of the company)  pay more attention to the economics and long term benefits of the business than the short term share price.

 

+1. He won't do all those SYW and spin offs if he just want to screw the minority investors.

He would have done it easiler 2-3 years ago.

[Vish_ram]

It may appear counter-intuitive. If Q3/Q4 losses are going to be more, why borrow and lose more?

 

Isn't SHLD better off closing the doors for the holidays and conserving cash?

 

or, operate as biz as usual and don't load up on holiday season

[Picasso]

 

I think people forget that is it the job of both Lampert and Berkowitz to do what is in the best interest of their investors.  If the share price drops low enough, I don't know what protection there is for the small investors outside those funds.

 

Actually NO.  Please refer to Martin Whiteman's  recent book "Modern Security Analysis", Chapter 12, "The Significance (or Lack of Significance) of Market Performance".

 

For the control shareholders (like Lampert and Berkowitz), their timeline is different than the outside passive minority investors (OPMI). Market prices are considerably less important to the control shareholders than to the OPMI. The control sharesholder (true owners of the company)  pay more attention to the economics and long term benefits of the business than the short term share price.

 

Berkowitz runs a mutual fund.  How is he not looking out for the best interests of his investors?

 

If the share price of SHLD drops to $15 and he has the ability to take it private at $25-30 when he thinks it is worth $150, why would he not participate in that?  He would otherwise risk having Lampert take full control.

 

So I suppose the large shareholders in DELL (Silverlake?) should take solace in the fact that Michael Dell was able to take the stock private well below their estimation of intrinsic value.  Or how Rich Kinder was able to take KMI private when the stock went below the level of value he felt was justified.  How did BBRY shareholders feel when Prem made an offer in the single digits?

 

Even if the controlling shareholder is looking out for the long-term, I just don't see how you can believe a minority investor will also be able to participate in a way which creates a margin of safety.  This is the downside to these kinds of owner-operator jockey stocks.

 

I am not saying he is looking to screw the minority investors, but if the price is attractive enough a going private transaction at an unfavorable price can easily happen.

[heth247]

 

If the share price of SHLD drops to $15 and he has the ability to take it private at $25-30 when he thinks it is worth $150, why would he not participate in that?  He would otherwise risk having Lampert take full control.

 

So I suppose the large shareholders in DELL (Silverlake?) should take solace in the fact that Michael Dell was able to take the stock private well below their estimation of intrinsic value.  Or how Rich Kinder was able to take KMI private when the stock went below the level of value he felt was justified.  How did BBRY shareholders feel when Prem made an offer in the single digits?

 

Even if the controlling shareholder is looking out for the long-term, I just don't see how you can believe a minority investor will also be able to participate in a way which creates a margin of safety.  This is the downside to these kinds of owner-operator jockey stocks.

 

I am not saying he is looking to screw the minority investors, but if the price is attractive enough a going private transaction at an unfavorable price can easily happen.

 

Those are valid points. And yes, you have to choose the right jockey to ride with. At this time, I'd worry more about SHLD's transformation than the risk of being taken private. I believe Eddie is also more focused on that too.

 

[Liberty]

Looks like the bulls will be able to take their time loading up under 30...

[Luke 532]

Looks like the bulls will be able to take their time loading up under 30...

 

I'm curious who has added, initiated, or sold in the past week?  I don't expect much response as that's very personal, but I'm just curious.

[Picasso]

The interesting thing is how people sold LE to buy more SHLD.  I know it has only been a few months but the better investment thus far was to sell SHLD and use that to buy more LE.

 

I am curious how that trade will look going out several years.

[focusinvestor]

Looks like the bulls will be able to take their time loading up under 30...

 

I'm curious who has added, initiated, or sold in the past week?  I don't expect much response as that's very personal, but I'm just curious.

 

I added today. My thesis has not changed at all.

[adesigar]

Looks like the bulls will be able to take their time loading up under 30...

 

I'm curious who has added, initiated, or sold in the past week?  I don't expect much response as that's very personal, but I'm just curious.

 

Ill add more but it needs to drop under $25 and preferably under $20. Adjusted for $10 per share of LE its still much higher than earlier this year. 

[ZenaidaMacroura]

I made a lot of money, probably a 50-75% IRR, last year to early this year - I consider myself lucky. I am neutral now, neither bullish or bearish.

 

You can add another 5% compounded by mid-January with the $25 strike put premium, and if you get called you can write a call for more premium.  Like falling back to a defensive position and keeping on fighting -- cue the end scene of Saving Private Ryan.  Find a defilade position!  Jackson!

 

The annualized rate on the out-of-the-money puts is far in excess of the burn rate of SYW strategy.  Defensive position... fall back... fight... defensive position... fall back.

 

It's tough to be short too.  The borrow costs... the premium costs... it's a war of attrition between longs and shorts.

 

I did just this today, except with the $20 strike at $1 premium. 5% return in 4 months is pretty damn good, with very minimal risk IMO.

 

Another option, if you're a long-term bull, is to buy the shares and lend them out.  Current Rebate Rate at Interactive Brokers is 14.91%.  More risk, obviously, but you also get to participate in potential upside.

How often are your securities available to be lent out utilized?  I have enabled particiaption in the stock yield enhancement program but I almost never get my entire position lent out (and probably not at such an attractive rebate rate either).

[Luke 532]

I made a lot of money, probably a 50-75% IRR, last year to early this year - I consider myself lucky. I am neutral now, neither bullish or bearish.

 

You can add another 5% compounded by mid-January with the $25 strike put premium, and if you get called you can write a call for more premium.  Like falling back to a defensive position and keeping on fighting -- cue the end scene of Saving Private Ryan.  Find a defilade position!  Jackson!

 

The annualized rate on the out-of-the-money puts is far in excess of the burn rate of SYW strategy.  Defensive position... fall back... fight... defensive position... fall back.

 

It's tough to be short too.  The borrow costs... the premium costs... it's a war of attrition between longs and shorts.

 

I did just this today, except with the $20 strike at $1 premium. 5% return in 4 months is pretty damn good, with very minimal risk IMO.

 

Another option, if you're a long-term bull, is to buy the shares and lend them out.  Current Rebate Rate at Interactive Brokers is 14.91%.  More risk, obviously, but you also get to participate in potential upside.

How often are your securities available to be lent out utilized?  I have enabled particiaption in the stock yield enhancement program but I almost never get my entire position lent out (and probably not at such an attractive rebate rate either).

 

I haven't lent them out very often in the past as I fear failure-to-deliver issues on any sudden price spike.  So I'm not the one to answer that question for you.

[randallchsu]

• SHC has uncommitted $500M commercial paper capacity, $7M outstanding on Aug 2, 2014
  
• We are permitted to raise up to a maximum of $760M in additional 2nd lien debt subject to borrowing base requirements4
  
• We have substantial unencumbered real estate portfolio and there are numerous forms of transactions that we believe we could take advantage of to provide additional liquidity
  

Above is from slide 14 of the SHLD Q2 2014 presentation deck.  So how come SHLD doesn't get money from commercial paper and 2nd lien debt first?

 

Looking from last year's commercial paper program, why can't something similar be done this year?

 

Unsecured Commercial Paper

During the first half of 2014 and 2013, ESL and its affiliates held unsecured commercial paper issued by Sears Roebuck Acceptance Corp. (“SRAC”), an indirect wholly owned subsidiary of Sears Holdings. For the commercial paper outstanding to ESL, the weighted average of each of maturity, annual interest rate, and principal amount outstanding was 30.7 days, 2.78% and $25.3 million and 30.6 days, 2.78% and $273 million, respectively, in the first half of 2014 and 2013. The largest aggregate amount of principal outstanding to ESL at any time since the beginning of 2014 was $150 million and $0.4 million interest was paid by SRAC to ESL during the first half of 2014. ESL held $235 million in principal amount of commercial paper at August 3, 2013, which included $143 million held by Mr. Lampert. Neither ESL nor Mr. Lampert held any of our commercial paper at August 2, 2014 or February 1, 2014. The commercial paper purchases were made in the ordinary course of business on substantially the same terms, including interest rates, as terms prevailing for comparable transactions with other persons, and did not present features unfavorable to the Company.

[ni-co]

• SHC has uncommitted $500M commercial paper capacity, $7M outstanding on Aug 2, 2014
  
• We are permitted to raise up to a maximum of $760M in additional 2nd lien debt subject to borrowing base requirements4
  
• We have substantial unencumbered real estate portfolio and there are numerous forms of transactions that we believe we could take advantage of to provide additional liquidity
  

Above is from slide 14 of the SHLD Q2 2014 presentation deck.  So how come SHLD doesn't get money from commercial paper and 2nd lien debt first?

 

Looking from last year's commercial paper program, why can't something similar be done this year?

 

Unsecured Commercial Paper

During the first half of 2014 and 2013, ESL and its affiliates held unsecured commercial paper issued by Sears Roebuck Acceptance Corp. (“SRAC”), an indirect wholly owned subsidiary of Sears Holdings. For the commercial paper outstanding to ESL, the weighted average of each of maturity, annual interest rate, and principal amount outstanding was 30.7 days, 2.78% and $25.3 million and 30.6 days, 2.78% and $273 million, respectively, in the first half of 2014 and 2013. The largest aggregate amount of principal outstanding to ESL at any time since the beginning of 2014 was $150 million and $0.4 million interest was paid by SRAC to ESL during the first half of 2014. ESL held $235 million in principal amount of commercial paper at August 3, 2013, which included $143 million held by Mr. Lampert. Neither ESL nor Mr. Lampert held any of our commercial paper at August 2, 2014 or February 1, 2014. The commercial paper purchases were made in the ordinary course of business on substantially the same terms, including interest rates, as terms prevailing for comparable transactions with other persons, and did not present features unfavorable to the Company.

 

As mentioned earlier in this thread: It could be done. It simply got more expensive because of the Moody's downgrade. My theory on this is that Lampert thinks that borrowing money with this rating is a bad deal for Sears. What can he do about it? Nothing, except that he can take the other side of this trade so that at least his ESL investors can profit from it. I think this is all there is behind this deal.

 

Those conspiracy theories don't look convincing to me, at all. If he wanted to take SHLD private (or ______ <– insert your favorite sinister plan here), why would he do it through ESL and not by himself? Why letting investors profit if you can have "the best 25 Sears buildings" all for yourself? This doesn't make sense.

 

The risk with SHLD is not liquidity or solvency in the short term, it's business model risk – but that isn't exactly what I would call a new insight. So, in my mind, this price drop is simply a knee-jerk reaction by Mr Market (i.e. people not using their brains) – nothing more.

[20ppy]

• SHC has uncommitted $500M commercial paper capacity, $7M outstanding on Aug 2, 2014
  
• We are permitted to raise up to a maximum of $760M in additional 2nd lien debt subject to borrowing base requirements4
  
• We have substantial unencumbered real estate portfolio and there are numerous forms of transactions that we believe we could take advantage of to provide additional liquidity
  

Above is from slide 14 of the SHLD Q2 2014 presentation deck.  So how come SHLD doesn't get money from commercial paper and 2nd lien debt first?

 

Looking from last year's commercial paper program, why can't something similar be done this year?

 

Unsecured Commercial Paper

During the first half of 2014 and 2013, ESL and its affiliates held unsecured commercial paper issued by Sears Roebuck Acceptance Corp. (“SRAC”), an indirect wholly owned subsidiary of Sears Holdings. For the commercial paper outstanding to ESL, the weighted average of each of maturity, annual interest rate, and principal amount outstanding was 30.7 days, 2.78% and $25.3 million and 30.6 days, 2.78% and $273 million, respectively, in the first half of 2014 and 2013. The largest aggregate amount of principal outstanding to ESL at any time since the beginning of 2014 was $150 million and $0.4 million interest was paid by SRAC to ESL during the first half of 2014. ESL held $235 million in principal amount of commercial paper at August 3, 2013, which included $143 million held by Mr. Lampert. Neither ESL nor Mr. Lampert held any of our commercial paper at August 2, 2014 or February 1, 2014. The commercial paper purchases were made in the ordinary course of business on substantially the same terms, including interest rates, as terms prevailing for comparable transactions with other persons, and did not present features unfavorable to the Company.

 

As mentioned earlier in this thread: It could be done. It simply got more expensive because of the Moody's downgrade. My theory on this is that Lampert thinks that borrowing money with this rating is a bad deal for Sears. What can he do about it? Nothing, except that he can take the other side of this trade so that at least his ESL investors can profit from it. I think this is all there is behind this deal.

 

Those conspiracy theories don't look convincing to me, at all. If he wanted to take SHLD private (or ______ <– insert your favorite sinister plan here), why would he do it through ESL and not by himself? Why letting investors profit if you can have "the best 25 Sears buildings" all for yourself? This doesn't make sense.

 

The risk with SHLD is not liquidity or solvency in the short term, it's business model risk – but that isn't exactly what I would call a new insight. So, in my mind, this price drop is simply a knee-jerk reaction by Mr Market (i.e. people not using their brains) – nothing more.

 

+1

 

I added some yesterday.

[TwoCitiesCapital]

• SHC has uncommitted $500M commercial paper capacity, $7M outstanding on Aug 2, 2014
  
• We are permitted to raise up to a maximum of $760M in additional 2nd lien debt subject to borrowing base requirements4
  
• We have substantial unencumbered real estate portfolio and there are numerous forms of transactions that we believe we could take advantage of to provide additional liquidity
  

Above is from slide 14 of the SHLD Q2 2014 presentation deck.  So how come SHLD doesn't get money from commercial paper and 2nd lien debt first?

 

Looking from last year's commercial paper program, why can't something similar be done this year?

 

Unsecured Commercial Paper

During the first half of 2014 and 2013, ESL and its affiliates held unsecured commercial paper issued by Sears Roebuck Acceptance Corp. (“SRAC”), an indirect wholly owned subsidiary of Sears Holdings. For the commercial paper outstanding to ESL, the weighted average of each of maturity, annual interest rate, and principal amount outstanding was 30.7 days, 2.78% and $25.3 million and 30.6 days, 2.78% and $273 million, respectively, in the first half of 2014 and 2013. The largest aggregate amount of principal outstanding to ESL at any time since the beginning of 2014 was $150 million and $0.4 million interest was paid by SRAC to ESL during the first half of 2014. ESL held $235 million in principal amount of commercial paper at August 3, 2013, which included $143 million held by Mr. Lampert. Neither ESL nor Mr. Lampert held any of our commercial paper at August 2, 2014 or February 1, 2014. The commercial paper purchases were made in the ordinary course of business on substantially the same terms, including interest rates, as terms prevailing for comparable transactions with other persons, and did not present features unfavorable to the Company.

 

As mentioned earlier in this thread: It could be done. It simply got more expensive because of the Moody's downgrade. My theory on this is that Lampert thinks that borrowing money with this rating is a bad deal for Sears. What can he do about it? Nothing, except that he can take the other side of this trade so that at least his ESL investors can profit from it. I think this is all there is behind this deal.

 

Those conspiracy theories don't look convincing to me, at all. If he wanted to take SHLD private (or ______ <– insert your favorite sinister plan here), why would he do it through ESL and not by himself? Why letting investors profit if you can have "the best 25 Sears buildings" all for yourself? This doesn't make sense.

 

The risk with SHLD is not liquidity or solvency in the short term, it's business model risk – but that isn't exactly what I would call a new insight. So, in my mind, this price drop is simply a knee-jerk reaction by Mr Market (i.e. people not using their brains) – nothing more.

 

+1

I added yesterday as well. Still a small position for me. I'm glad that this board has mostly intelligent people. At SeekingAlpha everyone is in the conspiracy boat and that there isnt a single critial thought amongst them. Even here, most diverging arguments have good points in both sides.

 

They believe he's able to take the 25 best properties worth billions for a default on 400M and keep it all. I asked if that was really possible, why wouldnt he have simply made a $1 loan and collaterlized it with all of the properties. All we've done is substituted two numbers (1 for 400M and 25 for All) and it immediately becomes obvious that the proposition is ridiculous. Queu straw man arguments and ad hominem attacks. So glad you guys aren't like that.

[elevensecsrt4]

^^^. Totally agree with above. This site is worth every penny of admission! 

Love the well thought analysis and discussion. Bears and bulls

[randallchsu]

As mentioned earlier in this thread: It could be done. It simply got more expensive because of the Moody's downgrade. My theory on this is that Lampert thinks that borrowing money with this rating is a bad deal for Sears. What can he do about it? Nothing, except that he can take the other side of this trade so that at least his ESL investors can profit from it. I think this is all there is behind this deal.

 

Those conspiracy theories don't look convincing to me, at all. If he wanted to take SHLD private (or ______ <– insert your favorite sinister plan here), why would he do it through ESL and not by himself? Why letting investors profit if you can have "the best 25 Sears buildings" all for yourself? This doesn't make sense.

 

The risk with SHLD is not liquidity or solvency in the short term, it's business model risk – but that isn't exactly what I would call a new insight. So, in my mind, this price drop is simply a knee-jerk reaction by Mr Market (i.e. people not using their brains) – nothing more.

 

Yes the downgrade will make normal loans more expensive, but still it does not explain why a similar commercial paper program cannot be done this year.

 

At August 3, 2013, ESL held $235 million in principal amount of commercial paper, which included $143 million held by Mr. Lampert. Neither ESL nor Mr. Lampert held any of our commercial paper at August 2, 2014 or February 1, 2014. For the commercial paper outstanding to ESL, the weighted average of each of maturity, annual interest rate, and principal amount outstanding was 30.7 days, 2.78% and $25.3 million and 30.6 days, 2.78% and $273 million, respectively, in the first half of 2014 and 2013.

 

I do not believe a downgrade will block Mr. Lampert himself from lending unsecured commercial paper to Sears at a higher rate say 3-4%. He did it last year, so what stopping him this year? Is there another logic behind this?

[wisdom]

Go back at look at the history with ESL and SHLD and check if ESL has done this in the past and what the reasoning was behind it.

[BTShine]

Isn't it possible they've also borrowed money via commercial paper and their line of credit?  I mean, it's virtually a given, right?

[randomep]

 

 

Does anyone know the total value of all the sears divestures since 2007 or so? Hard to keep track of them all.....

[Luke 532]

 

 

Does anyone know the total value of all the sears divestures since 2007 or so? Hard to keep track of them all.....

 

Here's some of the transactions... see page 26 of the presentation (page 27 of the PDF): http://searsholdings.com/invest/docs/Q1_2014_Webcast.pdf

[Guest 50centdollars]

Don't know if this was posted yet.

 

http://blogs.barrons.com/stockstowatchtoday/2014/09/18/sears-the-end/

[peridotcapital]

 

 

Does anyone know the total value of all the sears divestures since 2007 or so? Hard to keep track of them all.....

 

Assuming you held onto everything they have spun off, the current value is ~$23 per share (OSH, SHOS, LE, SEARF).

[LC]

The risk with SHLD is not liquidity or solvency in the short term, it's business model risk – but that isn't exactly what I would call a new insight. So, in my mind, this price drop is simply a knee-jerk reaction by Mr Market (i.e. people not using their brains) – nothing more.

 

It's like a ticking time bomb, right? How much time Eddie will take to right the ship, if ever. The RE gives him a lot of time. He can draw liquidity from its value.

 

So I see it in very basic terms: he either rights the ship (whether that takes 6 months or 6 years), or he doesn't.

 

Then the question becomes, why buy now? Why not wait until operations turn? Presumably there will be plenty of time to build a position as retail operations won't simply turnaround in just a single quarter or even a year.

[ni-co]

The risk with SHLD is not liquidity or solvency in the short term, it's business model risk – but that isn't exactly what I would call a new insight. So, in my mind, this price drop is simply a knee-jerk reaction by Mr Market (i.e. people not using their brains) – nothing more.

 

It's like a ticking time bomb, right? How much time Eddie will take to right the ship, if ever. The RE gives him a lot of time. He can draw liquidity from its value.

 

So I see it in very basic terms: he either rights the ship (whether that takes 6 months or 6 years), or he doesn't.

 

Then the question becomes, why buy now? Why not wait until operations turn? Presumably there will be plenty of time to build a position as retail operations won't simply turnaround in just a single quarter or even a year.

 

I agree, more or less. Though the time to buy is a matter of personal appetite for risk, IMO. Risk and reward are greatest before the dust has settled.