In his dual role as Chairman of Sears (NASDAQ:SHLD) as well as CEO of ESL Investments, Eddie Lampert finds himself caught in a conflict of fiduciary interest. He is supposed to act in the best interest of his hedge fund investors which causes him problems as the CEO of Sears and vice versa. What used to be a win win has turned into a lose lose. Perhaps the only option he has left is to artificially prop up SHLD through buybacks as he announced yesterday in his $500 million deal. These efforts will only prolong the inevitable that in a struggling economy the weak get eaten alive by the strong, and Sears' retail definitely is weak. With real estate long gone as the backbone of this stock, Sears is finally facing the music of its retail disaster.
When the newly merged company exited bankruptcy, the hope of real estate liquidation served as a nice catalyst to surge to share price from $25 a share up to $180. Sears carved out a real estate niche even though many other retailers could also be viewed as real estate plays. Why did Sears get the nod? Because its retail was so awful that there was no other bullish angle to play and because investors hoped that Lampert would use it as an investment vehicle similar to Warren Buffett's Berkshire Hathaway (NYSE:BRK.A).
Lampert had a chance to put this plan into effect but his greed got in the way. He wanted to milk every last bit of cash from the retail side in order to buy back every share possible before selling any valuable real estate. This was a great path, but now it appears there won't be enough cash or patience to survive. Mall locations will be flooded with excess inventories for years to come and the size of the old Kmart stand alone stores are no longer appealing to the super sized Walmarts (NYSE:WMT) and Targets (NYSE:TGT). I'm afraid this is a classic case of a guy who left his hedge fund area of expertise and got caught up in an illiquid mess.
Don't let yesterday's huge up day in SHLD stock fool you. Sears is trading at a significant premium to its peers and it won't last through this nasty downturn. Even Lampert's buddies are exiting the investment, Bill Ackman of Pershing Square has sold about $550 million in SHLD over the last few months. Credit Suisse analyst Gary Balter recently commented that SHLD is the most expensive stock they cover. All the bargains in the world won't get shoppers back to Sears and even if they did, the anemic margins would further pummel the share price. The moral of this story is that the real estate play is done, gone, capoosh; and that was the only element of intrigue in this stock.
Commercial real estate guru Harvey Green appeared on CNBC yesterday and forecast a bottom in commercial real estate to hit in Q3 of 2009. Let's assume that he is correct, that would infer another 15%-20% drop in value and then how long would it take for Lampert's leases and properties to become attractive again? 2011, maybe 2012. In the short term, he is going to be dealing with continued redemptions from his hedge fund which will force him to sell down SHLD. I don't think the retail cash flow can compensate for the hedge fund outflow. It is a vicious cycle that will take the stock down to single digits. March 2009 $30 puts are looking like a nice trade to average into on a day like this.
Disclosure: Own SHLD puts.