SHLDQ - Sears Holdings Corp

[ScottHall]

www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

That's probably the best analysis I've seen of Sears so far. It is pretty good.

 

I am surprised there are not any details about the insurance business.

[zarley]

www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

Great info.  Thanks for sharing.

[Guest hellsten]

www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

Thank you. I'm biased, but this is one of the best presentations I've seen recently. Hope the shorts don't read this document. I also wish SHLD goes to $20-30 by Christmas…

 

Very interesting comments from Simon Property Group, CBL & Associates, Kimco, and General Growth Property:

 

there remains fierce competition for the A -- the prime-quality assets out there.

…

more money chasing these B assets because there's been frustration out there

that people can't acquire the A assets

…

I personally continue to be fascinated by this lack of new supply.

…

The old days of buying 50 to 100 acres and going through years of entitlements and environmental

fights and then pre-leasing and then getting construction financing, I -- we just don't see that coming

back anytime soon.

…

I’d say that we talk to Sears all the time…we have had conversations

with Sears about other situations and we are doing other things with them that will facilitate

redevelopment, we've talked to them about a whole range of possibilities, subleasing part of their

space, taking one floor to a two level store and then buying the stores and Sears has moved slow

and they want to try to do the right thing over time for their company and in these situations the

timing works for them and it works for us.

 

I guess they haven't heard that Jeff Bezos' masterplan will make physical stores obsolete.

 

Sum of the parts implies a mid-range equity estimate of $131/share,

providing both safety and upside potential ranging from 108% to 282%

 

For the first time, Eddie Lampert has aggressively acquired Sears

Holdings shares with personal capital at prices near current levels

 

The effective float of Sears has shrunk and is extraordinarily low –

approximately 6.9 million out of 106.5 million outstanding shares

 

Considering the very thin float, short sellers of SHLD appear to be either

dangerously overzealous, ignorant or both

 

 

Steven Roth, Vornado Realty Trust Chairman and CEO

Chairman’s Letter, 2004

“Sears was generally perceived as a slowly but surely declining retailer à la Two

Guys and Alexander’s, but we saw a collection of truly great (many irreplaceable)

assets: 128 million square feet in 873 stores, of which over two-thirds are

owned or ground leased in (I’m guessing) 70% of the best malls in America”

[Guest hellsten]

Interesting to see the documents from Morgan Stanley:

Morgan Stanley's bottom-up analysis for just the Sears real estate

resulted in a valuation of $7.6bn to $10.8bn in 2004 ($71-$100/share)

…

Morgan Stanley separately valued just the Kmart real estate

portfolio at ~$3bn, or an additional $28/share, in 2004

…

The high quality Sears locations are worth even more today than in 2004, as

mall rents are much higher and cap rates much lower than they were in 2004

…

A summer 2008 survey commissioned by Bruce Berkowitz estimated

the tax assessed value of owned real estate at ~$10.4bn ($97/share)

…

Based on conversations with brokers around the country, we believe that

Sears is pursuing leasing more aggressively than it has in the past

 

and all the references to LinkedIn :D

[tombgrt]

www.bakerstreetcapital.com/BakerStreet_SHLD.pdf

 

Thanks hyten1.

 

Was this released yesterday after market close? This could potentially boost the rally further. Fingers crossed!

[ASTA]

So pissed I only bought 10% should have bought leaps too but hey I am only a spring chicken and have another 40 years of investing :D

[ourkid8]

The fun is starting again!  :)  Now we all have another problem, exit strategy.  This has been going up solely based on a short squeeze and when the majority of the shorts are out, this will fall.

 

Tks,

S

[cubsfan]

The fun is starting again!  :)  Now we all have another problem, exit strategy.  This has been going up solely based on a short squeeze and when the majority of the shorts are out, this will fall.

 

Tks,

S

 

True, on the other hand, the Netfix squeeze has lasted for almost a year, and is still ongoing.

So, we are subject to other "good news" - transaction announcements by SHLD, etc.

 

Anyway, good problem to have.

[tombgrt]

The fun is starting again!  :)  Now we all have another problem, exit strategy.  This has been going up solely based on a short squeeze and when the majority of the shorts are out, this will fall.

 

Tks,

S

 

In those situations you'll always kick yourself. I bought 4% position leaps at $40, sold to soon and bought back at $50-ish with short term calls for a bit less and I still feel like an ass for not buying more. No one should be crazy enough to go 25%+ in leaps in 1 position let alone short dated calls!

 

Can sell 20% of my position now and make a profit no matter what the rest of the calls do. All because I was lucky enough to buy them at the first place based on a hunch.

[merkhet]

I agree with Parsad & ourkid8.

 

It has been a great couple of days, but it's largely unknown how this will continue to play out. However, it's a great training ground for maintaining equanimity in the face of euphoria. Perhaps it would be prudent for most people to set a certain trigger price at which they sell part or all of their position -- so as not to let emotions take free reign on the decision-making apparatus.

[Parsad]

I agree with Parsad & ourkid8.

 

It has been a great couple of days, but it's largely unknown how this will continue to play out. However, it's a great training ground for maintaining equanimity in the face of euphoria. Perhaps it would be prudent for most people to set a certain trigger price at which they sell part or all of their position -- so as not to let emotions take free reign on the decision-making apparatus.

 

Rather than selling like I did with the Overstock options, I'm buying early 2014 puts on small segments as it goes up, so I can reap the gain in 2014 instead of 2013.  I will buy puts to lock in the gains as the year progresses rather than sell...and as there is a mis-match (I own 2015 calls, but 2014 puts), the frictional costs won't be too onerous.  Cheers!

[wisdom]

I love to observe the change in emotions on this board -

 

It is interesting to see the change in sentiment. The same thoughts as Baker were being put forth and it was difficult for people to see as the price dropped to $39.

 

Yet, the 2 week move in the share price seems to have made people into believers. I don't know what to think of it.

 

PS. SHLD is my largest position. I am in this for the long run as I believe this goes much higher.

[cubsfan]

I love to observe the change in emotions on this board -

 

It is interesting to see the change in sentiment. The same thoughts as Baker were being put forth and it was difficult for people to see as the price dropped to $39.

 

Yet, the 2 week move in the share price seems to have made people into believers. I don't know what to think of it.

 

PS. SHLD is my largest position. I am in this for the long run as I believe this goes much higher.

 

I stopped talking to people about SHLD last year.

 

The reaction was so negative. But attending the shareholder meetings

showed there could be a chance to turn the retailer and there was a plan

if that didn't happen. The press on the other hand, never gave them a chance.

 

We'll see what happens LT, but this Baker report, if believed, is impressive work.

[ourkid8]

I do not believe the sentiment has changed at all besides the fact the short squeeze is taking place.  I am somewhat of a believer in Eddie's long term strategy but short term this is moving SOLELY based on a squeeze.  The issue still remains, how fast can he monetize the assets and that is still unknown.  Sears brick and mortar retailing IMO is dead and the comps are proving it. 

 

Tks,

S

 

I love to observe the change in emotions on this board -

 

It is interesting to see the change in sentiment. The same thoughts as Baker were being put forth and it was difficult for people to see as the price dropped to $39.

 

Yet, the 2 week move in the share price seems to have made people into believers. I don't know what to think of it.

 

PS. SHLD is my largest position. I am in this for the long run as I believe this goes much higher.

[warrior]

Have you considered risks in lending shares from your account? Do brokers (Schwab, TDAm,...) guarantee safety in getting back those shares? What happens to your shares if the party to whom your shares were lent defaults (go broke!)?

 

I vaguely remember (during 2008 crisis, I think) Charlie Munger recommended NOT to have your shares in margin account.

That is an interesting question. I don't know the answer. Will the broker be responsible then?

 

I have no idea how it works at the retail level, but at the institutional level, absent an agreement to the contrary and/or some collateral or other arrangement, if the securities borrower fails to return the shares the lender is SOL and would need to litigate to get some kind of restitution.  Likely if someone just doesn't return the shares it's because they are going under and one would be an unsecured creditor of the bankruptcy estate.  But as I said, no clue how it works in retail land.  I have to believe that as part of the agreement with the broker one lends at their own risk.  It would behoove someone doing this to check their underlying documentation and/or speak to their lawyer.

we use cash collateral  105% mark to market daily. Im comfortable with that.

The practice in industry    102% cash collateral an up .

Im not sure about retail , I would guess that  it should be somewhere  the same, I would assume that  prime broker would use  at least 100% cash collateral,

I would suggest checking disclosure with prime broker.

 

Today SHLD

1day -2143 bp

7 days -2116bp

30 days -1637bp

Utilisation almost 99%, indeed it is hard to come by with shares, at the present capacity is limited.

Short sellers, in addition  paying high fees, if selling dividend-paying stocks dividend reimbursement.

 

To give some perspectives to lend BRK,

1 day 4pb

7 days 5bp

30 days 5 bp

 

Utilisation 0.25%

 

I guess you can feel the difference :)

 

 

 

[matts]

I think there is a mistaken assumption in the baker report. It subtracts the 7.5% of shares held by index funds/etfs to arrive at a free float of 6.5%. Then they use that 6.5% to determine that shares short are 230% of float.

 

But I believe almost all index funds/etfs lend out the shares, so really, "lendable float" is at least 14% and the ratio is 106%. And that is assuming that ALL the other top holders have turned off their stock loan, which i'm sure is not the case.

 

I'm actually pretty disappointed with this omission by baker. Not sure how much I can trust a hedge fund that has such a loose understanding of the securities lending market while making it a part of their thesis.

[BTShine]

I love to observe the change in emotions on this board -

 

It is interesting to see the change in sentiment. The same thoughts as Baker were being put forth and it was difficult for people to see as the price dropped to $39.

 

Yet, the 2 week move in the share price seems to have made people into believers. I don't know what to think of it.

 

PS. SHLD is my largest position. I am in this for the long run as I believe this goes much higher.

 

Fascinating!!!  This board always heats up when the stock price jumps...and once the price jumps people talk more about their positions and seem to have stronger conviction.  Fascinating.

[BTShine]

I think there is a mistaken assumption in the baker report. It subtracts the 7.5% of shares held by index funds/etfs to arrive at a free float of 6.5%. Then they use that 6.5% to determine that shares short are 230% of float.

 

But I believe almost all index funds/etfs lend out the shares, so really, "lendable float" is at least 14% and the ratio is 106%. And that is assuming that ALL the other top holders have turned off their stock loan, which i'm sure is not the case.

 

I'm actually pretty disappointed with this omission by baker. Not sure how much I can trust a hedge fund that has such a loose understanding of the securities lending market while making it a part of their thesis.

 

If one makes the assumption that etfs/index funds don't substantially buy or sell (except for the event of a major inflow/outflow of funds in/out of the etf) since they funds don't make investment decisions, they just allocate assets accross the board, could Baker Street assume that the etf owned shares are somewhat 'long term' in nature? 

 

People make the assumption that the Fairholme, ESL, Tisch shares are not part of the free float.  If true, I'd argue that etf owned shares are not part of the float either because etf's generally have to allocate shares according to a set % of assets.  Therefore they can't sell SHLD shares unless there's MAJOR outflows from the etf fund.  Is this thinking flawed?

[matts]

I think there is a mistaken assumption in the baker report. It subtracts the 7.5% of shares held by index funds/etfs to arrive at a free float of 6.5%. Then they use that 6.5% to determine that shares short are 230% of float.

 

But I believe almost all index funds/etfs lend out the shares, so really, "lendable float" is at least 14% and the ratio is 106%. And that is assuming that ALL the other top holders have turned off their stock loan, which i'm sure is not the case.

 

I'm actually pretty disappointed with this omission by baker. Not sure how much I can trust a hedge fund that has such a loose understanding of the securities lending market while making it a part of their thesis.

 

If one makes the assumption that etfs/index funds don't substantially buy or sell (except for the event of a major inflow/outflow of funds in/out of the etf) since they funds don't make investment decisions, they just allocate assets accross the board, could Baker Street assume that the etf owned shares are somewhat 'long term' in nature? 

 

People make the assumption that the Fairholme, ESL, Tisch shares are not part of the free float.  If true, I'd argue that etf owned shares are not part of the float either because etf's generally have to allocate shares according to a set % of assets.  Therefore they can't sell SHLD shares unless there's MAJOR outflows from the etf fund.  Is this thinking flawed?

 

Well if you are saying that ETFs buy and sell based on factors not necessarily due to the fundamentals of SHLD, how is that different than the average investor? What makes the ESL holding special is that he will not be selling based on the general market; the ETFs will. I don't view them as long term holders. They will sell as the market sells SHLD because its weightings in the indices will fall. For example, some ETFs might be overweight SHLD with the quick run up (depending on methodology) and will start selling right now. That seems like weak hands to me, the opposite of the case baker is trying to make.

 

[krazeenyc]

SHLD to me is a lot like YHOO pre Dan Loeb.

 

For years (post MSFT take over debacle) people talked about the value of Alibaba, Yahoo Japan, the cash etc. Yet -- even though Yahoo core represented 10-20% of value of the entire company -- the stock would manage to fall 10-15% every time there were lackluster earnings. Additionally, the stock would often rally to 18 bucks and fall back down. I was a Yahoo bull but often traded around the position -- b/c I was trained to see that the stock would die after $18-20.  I was lucky to buy in during the crash of that year -- and again when Mayer was going to "re-evaluate" their Alibaba proceeds. But I sold too early -- average price around $22 despite being a huge bull on Yahoo -- I wanted to protect my gains.

 

I think SHLD is worth over $100. I think if a REIT and/or KCD spin off happens the stock will rocket faster and more than Yahoo.  i think it is challenging to not pare a large position when it is up 40% in 2 weeks on no news whatsoever.

 

By the way, as opposed to those who are kicking themselves for not buying a large position in SHLD, I feel lucky that I bought as large a position as I did (and it was only about 5-6% at the time) when I did ($40-41 avg price)  -- the stock could just as well be trading at $35 right now.

[Luke 532]

I love to observe the change in emotions on this board -

 

It is interesting to see the change in sentiment. The same thoughts as Baker were being put forth and it was difficult for people to see as the price dropped to $39.

 

Yet, the 2 week move in the share price seems to have made people into believers. I don't know what to think of it.

 

PS. SHLD is my largest position. I am in this for the long run as I believe this goes much higher.

 

I sent this note to a few of my contacts earlier this morning...

 

I know you know, but it's always a good reminder... from a long-term value investing perspective, if you weren't comfortable buying SHLD at $39 ten days ago, don't buy it at $58 today (about 48% increase).  Nothing has changed with the business in ten days.  Think of it like this, if you were sort of lukewarm about a new car that cost $39,000 and then the dealer called you and said "everybody loves the car now, nothing has changed with it, but other people are buying it so you should, too!  And the price is $58,000 now instead of $39,000."  What would you do?  You'd hang up the phone.

 

If you find yourself fighting the urge to buy in the high-$50's when you were only lukewarm about the stock under $40, I'd recommend brushing up on the psychology of investing (I do this quite often).  Read "The Little Book of Behavioral Investing" by James Montier.  It's an excellent read.

 

With that said, I think SHLD is worth far more than the current $58-ish price.  The point of this e-mail was not to say SHLD is a bad buy at $58 (I think the opposite, the first tranche of shares I bought back in May were at $59), the point was to just do a mental check to make sure you're acting logically instead of emotionally.  It's easy to get wrapped up in the psychological/emotional aspect of investing/trading.  For example, if you ever find yourself thinking "I don't want to miss the run" then you're not investing, you're trading.  It's OK to trade, but it is vital to recognize the distinction.

[merkhet]

 

I love to observe the change in emotions on this board -

 

It is interesting to see the change in sentiment. The same thoughts as Baker were being put forth and it was difficult for people to see as the price dropped to $39.

 

Yet, the 2 week move in the share price seems to have made people into believers. I don't know what to think of it.

 

PS. SHLD is my largest position. I am in this for the long run as I believe this goes much higher.

 

 

I did a literal double-take when I flipped to page 42 of their report.

[Luke 532]

 

I love to observe the change in emotions on this board -

 

It is interesting to see the change in sentiment. The same thoughts as Baker were being put forth and it was difficult for people to see as the price dropped to $39.

 

Yet, the 2 week move in the share price seems to have made people into believers. I don't know what to think of it.

 

PS. SHLD is my largest position. I am in this for the long run as I believe this goes much higher.

 

 

I did a literal double-take when I flipped to page 42 of their report.

 

I believe the time to discuss the possibility of a short squeeze is before it actually happens.  I know some were bothered by the short interest discussion a few weeks ago, but I'm curious why is it now a more desirable topic to discuss after the 40%+ spike?

 

And why are we surprised by the short interest discussion in Baker Street's report?  We've been discussing this ad nauseam on this board for a month.

[merkhet]

I did a double take because it looked exactly like my spreadsheet (sans index funds). Just a feeling of déjà vu.

[Luke 532]

I did a double take because it looked exactly like my spreadsheet (sans index funds). Just a feeling of déjà vu.

 

I hear ya.  The math is there plain as day for anybody willing to look.  But I wouldn't be surprised if somebody was lurking and might have noticed your spreadsheet  ;)