SHLDQ - Sears Holdings Corp

[Guest qanary]

I seem to recall that a noted investor calculated that because of the short interest in SHLD during the last big scare he was able to loan out his shares at 100% annualized.  You pay me back the price of my shares within a year and give me the free optionality on whatever crazy stuff Lampert wants to try and I'll take it. 

 

Is that a weak bull thesis?  Maybe on SHLD, itself, but not necessarily on the investment.

 

I'm interested, thanks for posting Luke.

 

I don't see how the short interest plays a part in anyones thesis.  It only highlights how weak the bull thesis is when you need to sell the shares into short squeeze to turn a profit.

 

Wouldn't that fly in the face of value investing?  If you say you cannot time the turnaround so you want to buy the shares NOW, then what makes you think you will sell the shares at a price that allows you to buy back in and still hold SHLD for the long-term to realize those 10 bagger gains?  A short squeeze should have no bearing on the investment results.

 

Even Volkswagen went back and below the price at the start of the squeeze in 2008.

 

Edit:  It reminds me when I would look at stocktwits and see a bunch of retail investors go "squueeeeze, shorts getting squueeeezed."  I would immediately think the bull case is lacking substance.

[Luke 532]

I seem to recall that a noted investor calculated that because of the short interest in SHLD during the last big scare he was able to loan out his shares at 100% annualized.  You pay me back the price of my shares within a year and give me the free optionality on whatever crazy stuff Lampert wants to try and I'll take it. 

 

Is that a weak bull thesis?  Maybe on SHLD, itself, but not necessarily on the investment.

 

I'm interested, thanks for posting Luke.

 

I don't remember it ever being that high, but you do bring up a good point.  Right now it's roughly 15% at IB.  If you were to lend out your shares for 6+ years you'd make back your initial investment on borrowing rates alone (assuming rates are unchanged and you are able to lend all your shares, both of which are huge assumptions).  Not counting spin-offs, if the stock is trading at ~$15 6+ years from now that's roughly an 8% compounded annualized return.  Trading at ~$10 that's a 6% return.  Trading higher than today?  You're sitting pretty.

 

Forget about the real estate, KCD, Sears Re, Seritage, any future spin-offs, etc.  There is still an argument to be made that if SHLD just survives for 6+ years* the borrow rate provides increased downside protection the longer SHLD can survive.

 

I believe the MOS is there just based on net assets, but the borrowing rate (or the premium received on synthetic long positions) adds another element to the equation.

 

*of course, many bears believe SHLD will be dead within 2 years so they would argue this is an invalid analysis.

[Picasso]

I seem to recall that a noted investor calculated that because of the short interest in SHLD during the last big scare he was able to loan out his shares at 100% annualized.  You pay me back the price of my shares within a year and give me the free optionality on whatever crazy stuff Lampert wants to try and I'll take it. 

 

Is that a weak bull thesis?  Maybe on SHLD, itself, but not necessarily on the investment.

 

I'm interested, thanks for posting Luke.

 

I don't remember it ever being that high, but you do bring up a good point.  Right now it's roughly 15% at IB.  If you were to lend out your shares for 6+ years you'd make back your initial investment on borrowing rates alone (assuming rates are unchanged and you are able to lend all your shares, both of which are huge assumptions).  Not counting spin-offs, if the stock is trading at ~$15 6+ years from now that's roughly an 8% compounded annualized return.  Trading at ~$10 that's a 6% return.  Trading higher than today?  You're sitting pretty.

 

Forget about the real estate, KCD, Sears Re, Seritage, any future spin-offs, etc.  There is still an argument to be made that if SHLD just survives for 6+ years* the borrow rate provides increased downside protection the longer SHLD can survive.

 

I believe the MOS is there just based on net assets, but the borrowing rate (or the premium received on synthetic long positions) adds another element to the equation.

 

*of course, many bears believe SHLD will be dead within 2 years so they would argue this is an invalid analysis.

 

The effective yield on lending out a stock like SHLD is much less than 15%.  It depends on the security but the amount of time the shares are actually borrowed will lower the return.

 

In theory that could drop your risk on the position considerably.  I'd buy SHLD today if I could maintain a 15% income stream for at least 3 years.

 

[Mephistopheles]

Interesting, Luke. So are the interest dollars you earn based on the price of the stock when you lend? Or does it change with the stock price? I was under the assumption it was the latter, but your post seems to indicate otherwise.

[Picasso]

Guys check this out.  A $41 dollar Sears gift card for $25 dollars on craigslist.

 

For the low low price of one share of SHLD I get the right (not the obligation) to purchase $41 dollars of goods from our favorite retailer.  That is a 64% increase in the purchasing power of my Sears dollars.

 

http://inlandempire.craigslist.org/clo/4688880650.html

 

Anyone tracking the spread on CCC+ rated SRAC gift cards for a historical context?  I suppose a widening in the spread would indicate some stress on the gift card issuer since the buyer runs the risk of a worthless gift card should the operations wind down.  Curious how this spread would compare to an Apple gift card which I would consider as AAA rated.

[ZenaidaMacroura]

Interesting, Luke. So are the interest dollars you earn based on the price of the stock when you lend? Or does it change with the stock price? I was under the assumption it was the latter, but your post seems to indicate otherwise.

I will say this, even when the borrow was significantly more expensive not all of my shares were lent out consistently enough for me to yield anything approaching 15%.  Shos was much more consistently borrowed for the yield enhancement program in my experience (with IKBR).

 

 

[rijk]

No. He has had a significant personal investment in Sears for a while. It just means he didn't have to file a Form 3 until now.

 

thanks, any idea what triggered the sep 24 filing?

 

regards

rijk

[alertmeipp]

>>I hope you understand comparing the two is rather foolish.

 

But you just did.  ;)

 

I think others just pointing out Bruce owns both. BAC looked so wrong few years back but now everyone loves it. I bet no one here  buy SHLD because its retail is a wonderful business or it being too big to fail.

 

I think its pretty funny how someone can compare BAC/AIG to SHLD.  BAC/AIG are systemically important organization to the global economy which had short term issues(which have been addressed) but overall EXTREMELY profitable whereas SHLD has serious structural issues where the franchise continues to degrade and it is burning through cash with no end in sight.

 

I do not feel like going into a lengthy discussion about comparing the two organizations but I hope you understand comparing the two is rather foolish.

 

Tks,

S

 

It's funny how wrong Bruce looks until he's proved right. For example, he's down 20B AUM to 8B by being early (looking wrong) in AIG, BAC. Now look at them. People doubted those names just as much if not more than they doubt the SHLD long thesis.  I strongly suspect SHLD, FNMA and FMCC will be no different than AIG and BAC over time. People thought for sure BAC was going bust. It traded down to $5! The sky is falling SHLD bears, just like it was with AIG and BAC, right? Be sure to keep over analyzing every move by ESL and BB on a daily basis. You all deserve to be anchors on CNBC!

[Luke 532]

The effective yield on lending out a stock like SHLD is much less than 15%.  It depends on the security but the amount of time the shares are actually borrowed will lower the return.

 

Yes, the time they are borrowed of course matters.  My original post mentioned "assuming rates are unchanged and you are able to lend all your shares, both of which are huge assumptions."  But if you can lend your shares for an entire year the current rate is 15%.  As long as you don't participate in the Yield Enhancement Program at IB, and instead loan them out manually, then you get 15%.

 

In theory that could drop your risk on the position considerably.  I'd buy SHLD today if I could maintain a 15% income stream for at least 3 years.

 

Another alternative is a synthetic long position.  The January 2015 $25's could be bought with a premium received of ~$1.65/share last week (roughly 6.6% over 3.5 months)... then just repeat once the contracts expire.  The January 2016 $25's would get you $3.50/share (14% over 15+ months).  The advantage of the synthetic long position is you receive the premium up front and can invest it elsewhere if you see fit.  Doing this for 3 years would likely yield a nice income for you.

 

Interesting, Luke. So are the interest dollars you earn based on the price of the stock when you lend? Or does it change with the stock price? I was under the assumption it was the latter, but your post seems to indicate otherwise.

 

It changes with the stock price.  My calculation was just based on everything else being equal... lend rates, stock price (linear $25 until 6+ years from now it then trades at the $10 or $15), etc.  If the stock price drops the value drops but you also may see higher rates to offset it. 

 

I will say this, even when the borrow was significantly more expensive not all of my shares were lent out consistently enough for me to yield anything approaching 15%.  Shos was much more consistently borrowed for the yield enhancement program in my experience (with IKBR).

 

See the synthetic long alternative.

[merkhet]

No. He has had a significant personal investment in Sears for a while. It just means he didn't have to file a Form 3 until now.

 

thanks, any idea what triggered the sep 24 filing?

 

regards

rijk

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/msg190548/#msg190548

[heth247]

No. He has had a significant personal investment in Sears for a while. It just means he didn't have to file a Form 3 until now.

 

thanks, any idea what triggered the sep 24 filing?

 

regards

rijk

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/msg190548/#msg190548

 

So does this mean that Bruce will need to file form 4 for every one of his buy or sell transaction from now on ?

 

[elevensecsrt4]

No. He has had a significant personal investment in Sears for a while. It just means he didn't have to file a Form 3 until now.

 

thanks, any idea what triggered the sep 24 filing?

 

regards

rijk

 

 

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/shld-sears/msg190548/#msg190548

 

So does this mean that Bruce will need to file form 4 for every one of his buy or sell transaction from now on ?

 

I was hesitant to respond as I am not positively sure my answer is correct.

 

But I'm betting he doesn't have to file a form for buys anyway, I'm quite sure he has been buying since the purchases that were revealed up until sept 15th. 

[Mephistopheles]

So a lot of stores are closing now because they are having trouble financing the holiday inventory. Is this a blessing in disguise for the company since closing stores has been a big part of the bull thesis?

[Luke 532]

So a lot of stores are closing now because they are having trouble financing the holiday inventory.

 

I don't think it has as much to do with inventory levels as it does with the fact that they are money losing stores and Lampert is shriking the footprint.

[merkhet]

Someone mentioned that ESL has had a terrible record of capital allocation at Sears.

 

What's fascinating to me is that, in the interim, the rest of ESL's investments seem to have had a pretty good record. AutoNation, AutoZone, The Gap, etc. have all done fairly well, and those investments have been made during the same time period that he has owned/controlled Sears.

 

So it's rather strange to me to think that ESL has somehow lost his capital allocation abilities only as they apply to Sears. Now, it would be a wholly different thing to say that he has no good choices and only a ladder of least worst choices, but the sense I get from most posters is that people seem to think that he has completely lost it.

 

Just a thought.

[hardincap]

I get where you're coming from. Someone else posted that extraordinary investors can look ordinary when they step outside of their CoC. None of lampert's other investments were turnaround/transformation bets (in fact they were almost exclusively bets of financial engineering--shrinking share count). That sears is a rapidly deteriorating business and Lampert's allocation there has been abysmal so far makes one think maybe this could be a case of an extraordinary investor stepping outside his CoC.

 

Someone mentioned that ESL has had a terrible record of capital allocation at Sears.

 

What's fascinating to me is that, in the interim, the rest of ESL's investments seem to have had a pretty good record. AutoNation, AutoZone, The Gap, etc. have all done fairly well, and those investments have been made during the same time period that he has owned/controlled Sears.

 

So it's rather strange to me to think that ESL has somehow lost his capital allocation abilities only as they apply to Sears. Now, it would be a wholly different thing to say that he has no good choices and only a ladder of least worst choices, but the sense I get from most posters is that people seem to think that he has completely lost it.

 

Just a thought.

[constructive]

Someone mentioned that ESL has had a terrible record of capital allocation at Sears.

 

What's fascinating to me is that, in the interim, the rest of ESL's investments seem to have had a pretty good record. AutoNation, AutoZone, The Gap, etc. have all done fairly well, and those investments have been made during the same time period that he has owned/controlled Sears.

 

So it's rather strange to me to think that ESL has somehow lost his capital allocation abilities only as they apply to Sears. Now, it would be a wholly different thing to say that he has no good choices and only a ladder of least worst choices, but the sense I get from most posters is that people seem to think that he has completely lost it.

 

Just a thought.

 

AutoZone and Gap were in great shape and had great management before he got involved. Autonation a bit less. But all were far better businesses than Sears/K-Mart, and anyways he doesn't deserve that much credit for companies when he was just on the board and not CEO.

[Uccmal]

It seems rather simple to me and has for years.  Eddie Lampert is a perfect example of the Peter Principle in action. 

 

http://en.m.wikipedia.org/wiki/Peter_Principle

 

 

Fr. Wikipedia: The Peter Principle is a special case of a ubiquitous observation: Anything that works will be used in progressively more challenging applications until it fails. This is "The Generalized Peter Principle." There is much temptation to use what has worked before, even when it may exceed its effective scope. Peter observed this about humans.[1]

 

He was great as a passive investor, and maybe even good as a slightly involved investor, but reached his level of incompetence actually running a company. 

 

The destruction of Sears Canada under his tutelage has been spectacular.  I held SHLD 9 years ago and gratefully got out of it.  Eddie has proven, over and over, that he cant get a handle on this.  Now, he is trying to get out of it with something left over. 

 

 

[Picasso]

Alright I know I pissed off some people when I said "I should short this sucker" (which by the way was 30% higher than the current stock price) because of the denial from longs.  That said, the stock is now below the lows we saw in October of 2008 and it is starting to catch my interest but I began to realize something.  First off that performance since 2008 is freaking awful.  The market has gone nothing but straight up but the stock and underlying value has continued to deteriorate. 

 

I started off by thinking about a comment someone made how investing is a bit arrogant in that you believe the stock will go up after you buy it.  As if the rest of the market is that stupid, but you are the smart one to buy before it goes up.  Anyone buying should really think about that statement because there has been a lot of pain and opportunity cost in holding SHLD for years.  But don't worry, you will be the guy to get in on the ground floor before Baby Berkshire goes to the moon.

 

So I am trying to think about the mindset of Lampert now that we're back below 2008 levels and he needs to lend money to get these guys through the holidays.  If you liquidate, your NPV is somewhere between $25-40.  A giant waste of time and energy and everyone says "I told you so."  You get to take your ball and go home scarred from this experience.

 

On the other hand you have a $2.6 billion stock doing $30 billion of sales.  If you can somehow start turning a profit and the stock starts trading at 0.3x sales (or whatever multiple) it makes way more sense to give it more than a shot.  You didn't become a billionaire by being a pansy.  That $30 billion of sales is screaming at you to find a way to turn some of it into a profit.

 

So I don't buy this margin of safety on SHLD.  Eddie does not have the mindset to liquidate because lets be honest, none of us would either.  He has given no talk about a liquidation, he has doubled down or tripled down on his strategy, and even the store closure statements from SHLD say he is doing it to transform the company into a member centric model.  Eddie is going to go balls to the wall with SYW because that is the only way out of this mess.  His mentor Richard Rainwater would have a massive position and be dead wrong for years, but he would somehow be right in the end to justify the risk.  I don't see how you have that kind of mentor and suddenly back out and liquidate SHLD.

 

So if I look at the stock as less than a tenth of sales and the outcome is based on what the retail operations look like (if it was about the real estate they would have liquidated long time ago) then this stock looks a lot different. 

 

I think if I see investors realize there is no liquidation which eliminates the margin of safety, then I would buy the stock on any panic.  Because who knows maybe Eddie gets it right with SYW.  Otherwise it is just rangebound like it's been in the past and everything else seems like speculation or arrogance as far as why "now is the time."

[heth247]

Alright I know I pissed off some people when I said "I should short this sucker" (which by the way was 30% higher than the current stock price) because of the denial from longs.  That said, the stock is now below the lows we saw in October of 2008 and it is starting to catch my interest but I began to realize something.  First off that performance since 2008 is freaking awful.  The market has gone nothing but straight up but the stock and underlying value has continued to deteriorate. 

 

I started off by thinking about a comment someone made how investing is a bit arrogant in that you believe the stock will go up after you buy it.  As if the rest of the market is that stupid, but you are the smart one to buy before it goes up.  Anyone buying should really think about that statement because there has been a lot of pain and opportunity cost in holding SHLD for years.  But don't worry, you will be the guy to get in on the ground floor before Baby Berkshire goes to the moon.

 

So I am trying to think about the mindset of Lampert now that we're back below 2008 levels and he needs to lend money to get these guys through the holidays.  If you liquidate, your NPV is somewhere between $25-40.  A giant waste of time and energy and everyone says "I told you so."  You get to take your ball and go home scarred from this experience.

 

On the other hand you have a $2.6 billion stock doing $30 billion of sales.  If you can somehow start turning a profit and the stock starts trading at 0.3x sales (or whatever multiple) it makes way more sense to give it more than a shot.  You didn't become a billionaire by being a pansy.  That $30 billion of sales is screaming at you to find a way to turn some of it into a profit.

 

So I don't buy this margin of safety on SHLD.  Eddie does not have the mindset to liquidate because lets be honest, none of us would either.  He has given no talk about a liquidation, he has doubled down or tripled down on his strategy, and even the store closure statements from SHLD say he is doing it to transform the company into a member centric model.  Eddie is going to go balls to the wall with SYW because that is the only way out of this mess.  His mentor Richard Rainwater would have a massive position and be dead wrong for years, but he would somehow be right in the end to justify the risk.  I don't see how you have that kind of mentor and suddenly back out and liquidate SHLD.

 

So if I look at the stock as less than a tenth of sales and the outcome is based on what the retail operations look like (if it was about the real estate they would have liquidated long time ago) then this stock looks a lot different. 

 

I think if I see investors realize there is no liquidation which eliminates the margin of safety, then I would buy the stock on any panic.  Because who knows maybe Eddie gets it right with SYW.  Otherwise it is just rangebound like it's been in the past and everything else seems like speculation or arrogance as far as why "now is the time."

 

Its 0.13X not 0.3X of sales.  Either way, I think they probably won't have 30b sales by the time when they close all the stores they want to close, although part of the SYW's goal is to offset the impact of store closing on sales. But Eddie already talked about this using the "General Dynamics" example.

[alertmeipp]

Sears is doing a textbook transformation.

Milk old business cash flow and invest in the new. And proper sizing both.

 

Time will tell.

 

This guy has no intention to steal this company nor he will liquidate anytime soon.

[20ppy]

What an entry point at this level, this is stealing, not ESL is from shareholders. The shorts have done a good job with the media and everything, except they are taking the real risks.

[Luke 532]

Was just sent this Seritage flyer from another COBF user. 

"1 million square feet in 1 year"

http://www.mediabistro.com/portfolios/samples_files/1026046_mnWP0g1iB4iME85pUgmpMjt4F.pdf

 

[Matson125]

Luke, thank whoever sent this to you! LoL

 

There are locations here that I haven't seen before.

[wisdom]

https://finance.yahoo.com/news/big-shift-china-economy-disrupt-western-retailers-li-135928818--business.html

 

Comments by Chairman of Li & Fung.