Two Bright Spots in Economic Darkness: TD Ameritrade, Sears Holdings

Since there’s all of the bad news being pumped out there daily by the media, I thought it might be refreshing to talk about two of the bright spots that just came over the horizon.

If you are a regular reader of my blog, then you are aware of some of the signs of a strong company (even if you don’t know how to read balance sheets). One of those signs was to look for companies that feel strongly enough about their own financial situation in this environment that they can purchase another company (at least partly with cash). If you feel, as a company, that you can spare some cash for a purchase in this type of an environment, then you obviously feel strongly about your financial future.

That company? T.D. Ameritrade (AMTD). They are buying Think or Swim (SWIM) for a little over $600 million (and about $225 million will be in cash while the remainder will be in Ameritrade stock.) This tells me that the management of T.D. Ameritrade feels good about things going forward and they want to pick up some “value” while things are so suppressed out there. I also note that investors haven’t “driven down” the shares of Ameritrade quite as harshly as some of their nearest competitors (such as E*trade (ETFC), trading just over a buck a share!).

Ameritrade will also benefit from the expansion of their options business through Think or Swim. Think or Swim is a fast growing business that they gobbled up. Think or Swim increased their options business by 82% last year alone.

Ameritrade estimates that by picking up Think or Swim, they’ve saved themselves “several years” due to the advancements in trading that Think or Swim has that Ameritrade did not have. Plus, Think or Swim’s net income grew 10 fold over the last year. Wow! How many can say that. So they’re likely picking up a real jewel here thus making them a better, stronger company for the future.

These are things to look for in a company when you are building a portfolio of stocks in preparation for the recovery. This is not an outright recommendation to buy Ameritrade, but it does serve as a great example of the attributes in which I speak of.

The Next Bright Spot: America’s Biggest Department Store Blows Out Their Earnings Estimates

America’s biggest department store, Sears Holdings (SHLD), said it expects 4^th quarter earnings of between $2.44 to $3.09 a share, which blew past the analyst’s expectations of $1.92 a share. On top of that, they reported that they should end the year with approximately $1.3 billion dollars in cash. Wow! What a great thing in this environment.

This announcement caused the pair to gap higher on the chart on increased volume; he technicians out there will note that it broke an inverted head and shoulders (bullish chart) pattern on the chart.

So this gives the fundamentalist and the technician something to bite into here.

How did they do it? Good ole’ fashioned “belt tightening” and by promoting a very old fashioned system.

First, the belt tightening. They had to stop the employee 401k matching program for now which will preserve corporate cash. While employees have to give up a great “perk” for now…it helps them to keep the more important thing –their jobs! This shows that Sears is trying to preserve both jobs and cash right now which is a good thing.

The second thing – layaways. Yeah, that’s right. Remember those from “back in the day”? You don’t see those too much anymore ever since credit cards became so prevalent.

However, it’s a great system overall for both parties. The customer gets to make sure the product is available and will be there for them as they make payments and eventually pay off the bill and they usually pay little to no interest while in the process.

The corporation, on the other hand, can take that cash and earn some interest on the “held” payments in the mean time. So people who normally couldn’t shop with you due to them not having the full amount at the time OR those that can’t get credit cards can now shop with you. So you’ve increased your potential customer base while also increasing the size of the “cash pot” that you can earn interest on. It’s a great concept that has generally gone by the “way side”.

However, their Kmart division promoted this concept over the Christmas holidays and it evidently helped them greatly in these tough economic times. Also, think about all of the people in the U.S. that can’t get checking accounts and can’t even cash their own checks through a bank…these people can take their cash and do “lay-a-ways” at Kmart and get things that they might normally need a credit card for but don’t have the ability to obtain.

It pays to think creatively…and it looks like it paid off well for Sears Holdings. This type of “defensive” thinking could really help this company to emerge from the ashes for now and to put a bottom in their stock price.

So when picking your stocks, look for things like this where management is “using their heads” or where a company feels so strongly about the future that they are comfortable with giving up some cash for now (in these trying times) to purchase another company.

Little signs like this go a long way when a company is attempting to get an edge that can help to turn them around. Take note of things like this when you too are looking for stocks to build into your portfolio.

Disclosure: no positions

Comments

[Paul Price:]

There's a reason virtually all retailers gave up on layaways long ago.

They didn't work.

Many customers never followed through with the purchases and the merchandise often ended up 'stale' and 'out-of-season' once it was returned to stock.

Sears showed a drop of 12.8% in same store sales for December- hardly reason to cheer.

While EPS were pre-announced at better than expected numbers [from already decimated expectations], they were still horrible compared with all recent previous years for the Christmas seasons. They also excluded a number of significant items that are very real.

This was a clear case of Spin-101 to cause a short squeeze. It worked on Thursday but started to give back ground on Friday. SHLD has serious problems that cannot be solved by layaways.

Take the chance to get out now before the real shit hits the fan.

Jan 11 07:47 AM

[fcharlie:]

The Kmart layaway plan is for 8 weeks only. It's not like someone can put a winter coat on layaway and pay 2 dollars a month and then stop paying in summer and screw Kmart. A $5 fee just for using layaway can mean an extra 5% margin benefit if someone uses layaway to purchase a $100 item. KMarts gross margins are UP. This will be two quarters in a row they are TRENDING UP. There's also a $10 cancellation fee, payable up front and non refundable even if you miss a single weekly payment. Layaway is a great idea for many. Probably not the people reading the Seeking Alpha boards, but for the MILLIONS of people living week to week with no credit or maxed out credit cards, I'm sure many new customers were created, or pulled back in to Kmart because of layaway

Paul Price, you seem very confident that SHLD is going lower, possibly to zero. You say the "shit will hit the fan". Can you outline this scenario? I don't see it happening. What are you building into your assumptions between today and 18 months from now to cause the bankruptcy filing?

Jan 11 08:31 AM

[MrsLinarcos:]

Big problem with this article, I can't believe this person thinks Sears has a bright spot. The lights went out on this company long ago.

Jan 11 08:52 AM

[Harp:]

SHLD is more than department stores. See investment holdings and real estate value. Eddie Lambert may be more savvy than Warren Buffett.

Jan 11 03:25 PM

[myWealth.com:]

That's why it will likely go up. Because you can't get any retail investors to believe it.


On Jan 11 08:52 AM MrsLinarcos wrote:

> Big problem with this article, I can't believe this person thinks
> Sears has a bright spot. The lights went out on this company long
> ago.

Jan 11 08:21 PM

[myWealth.com:]

That's true and I agree with that...however, Sears is listed as the largest department store chain in its description that you see most places, so that's why I referred to it that way.

Yes, Eddie is pretty savvy and its pretty much the only reason that I think it has a chance....good CEO, it has investments that could work for it....and the technician in me likes the bullish charting pattern.

I also like it that no one seems to think it will go up. Those are the best candidates. If I get too many pats on the back ...I'm quick to double check my research...for the crowds tend to get it wrong and that's why I'm comfortable being a contrarian and bucking the crowd. It's served me well through the years.

Hey, thanks for reading my stuff. I appreciate it.


On Jan 11 03:25 PM Harp wrote:

> SHLD is more than department stores. See investment holdings and
> real estate value. Eddie Lambert may be more savvy than Warren Buffett.

Jan 11 08:25 PM

[myWealth.com:]

Thanks for taking the time to read the article whether we agree or not....much appreciated.


On Jan 11 07:47 AM Paul Price wrote:

> There's a reason virtually all retailers gave up on layaways long
> ago.
>
> They didn't work.
>
> Many customers never followed through with the purchases and the
> merchandise often ended up 'stale' and 'out-of-season' once it was
> returned to stock.
>
> Sears showed a drop of 12.8% in same store sales for December- hardly
> reason to cheer.
>
> While EPS were pre-announced at better than expected numbers [from
> already decimated expectations], they were still horrible compared
> with all recent previous years for the Christmas seasons. They also
> excluded a number of significant items that are very real.
>
> This was a clear case of Spin-101 to cause a short squeeze. It worked
> on Thursday but started to give back ground on Friday. SHLD has serious
> problems that cannot be solved by layaways.
>
> Take the chance to get out now before the real shit hits the fan.
>
>

Jan 11 08:25 PM

[H.J. Huneycutt:]

I'm admittedly intrigued by Sears. The stock is priced at a significant discount to book value right now, despite having positive free cash flows in recent years. Obviously, the retail environment has dramatically changed due to the economic crisis, however. Consumer spending is going to weaken over the next half-decade and buying into retail does not seem like a great idea at the moment. Also, from my own perspective, Sears has always seemed kinda junky and they don't seem to have any sort of niche. Yet, so long as Sears could find a way to become reasonably profitable, there's value here.

I'm not sure what to think. They could totally sink in the next decade or this could end up being one of those steals that most people didn't see. My money will just watch this from the sidelines.

Jan 12 02:34 AM

[myWealth.com:]

Yeah, you'll notice that Sears (SHLD) is holding up better than the market averages right now. That's a good sign. I agree things are weak in the retail space right now...but it's best to buy value when the "chips are down" as long as you feel they can weather the storm and that greater days lie ahead for them.

With Lambert at the helm and the investments that he has that could help to influence Sear's earnings...that helps in my book.


On Jan 12 02:34 AM H.J. Huneycutt wrote:

> I'm admittedly intrigued by Sears. The stock is priced at a significant
> discount to book value right now, despite having positive free cash
> flows in recent years. Obviously, the retail environment has dramatically
> changed due to the economic crisis, however. Consumer spending is
> going to weaken over the next half-decade and buying into retail
> does not seem like a great idea at the moment. Also, from my own
> perspective, Sears has always seemed kinda junky and they don't seem
> to have any sort of niche. Yet, so long as Sears could find a way
> to become reasonably profitable, there's value here.
>
> I'm not sure what to think. They could totally sink in the next
> decade or this could end up being one of those steals that most people
> didn't see. My money will just watch this from the sidelines.

Jan 13 09:47 AM