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By: Jake Mann and Alex Oleinic

One of the easiest ways to watch the hedge fund sentiment is by taking a look at their quarterly 13F filings. Hedge funds and other prominent investors are required to file 13F forms with the Securities and Exchange Commission several weeks after the end of each calendar quarter. Let's take a look at the top holding of Edward Lampert's ESL Investments, via his latest 13F, seen here, and it's also important to learn more about hedge fund piggybacking strategies.

Sears

The largest holding in terms of value is Sears Holdings Corporation (NASDAQ:SHLD), in which ESL Investments disclosed owning 33,856,069 shares, worth $1.7 billion. The hedge fund dumped 2,478,112 shares during the first three months of 2013; the value of the stake, however, advanced from $1.5 billion in the previous filing.

According to our database, aside from ESL, 16 other top-tier hedge funds held shares of Sears at the end of last year, including Bruce Berkowitz, Murray Stahl and Whitney Tilson (see Tilson's equity portfolio). Sears has a year-to-date return of almost 22%, though there seems to be one overarching factor for this appreciation.

The Lampert connection

One of the most intriguing aspects of Sears' connection with Lampert is the fact that the hedge fund manager has served as CEO for the majority of 2013, though his history with the retailer stretches back even further. Lampert was a key figure in Sears' 2005 purchase of Kmart-revenue is down about $10 billion since then-and his post as head honcho of Sears is focused on streamlining capital expenditures, but that hasn't worked thus far.

The department store retailer posted a worse-than-expected loss in its fiscal first quarter, in which Lampert said, "We should be doing a lot better than we are. Changing customer buying habits and changing forms of competition are challenging us in the retail industry generally and we must evolve our company and our business models to meet this challenge."

A REIT conversion

Much of the market's anticipation over Sears as a viable investment seems to stem from the possibility of a REIT conversion, as Lampert himself has been quoted as saying that they're expecting a "transaction tied to its real estate," according to MarketWatch.

Now, Sears-REIT speculation isn't new-it's been discussed for most of the last two years-but as the financial turnaround that Lampert and Co. have hoped for continues to seem less likely (many of its retail assets have already been spun off, such as Sears Hometown and Outlet Stores (NASDAQ:SHOS), which Lampert holds a $366.6 million stake in), a move toward REIT status seems possible.

In addition to boosting shareholder value, it's widely thought that a REIT conversion would benefit Sears from a cash flow standpoint, boosting inflows and generating at least a bit more stability than currently exists. The problem with that line of thinking is partially related to J.C. Penney (NYSE:JCP)'s woes, though, according to Margaret Bogenrief of ACM Partners. Bogenrief says that if any asset sales are part of the plan, this may present a problem, revealing, "with JCP rumored to be considering a liquidation of some of its assets, Lampert will be faced with assets immediately devalued in the marketplace."

Bogenrief's point is well thought out, and speaks to the broader woes of Sears' marketplace as a whole, but even if the long-term outlook is hazy at best, do investors still have something in this potential REIT play?

An analyst at 24/7 Wall Street is quick to mention that according to its latest financials, Sears' PP&E asset base is worth $5.9 billion alone. As of its last close, Sears' total market cap rested near $5.35 billion-a 9.3% discount.

Final thoughts

It remains to be seen what Lampert will do with Sears-and when he will do it-but if a REIT transaction is in the intermediate future, there's obvious value potential here. Sure, the nature of REIT conversions dictates that some are credit-negative events, but Sears may not have any other choice. Until any announcement is made one way or another, we'll continue to watch ESL Investments' SEC filings (see its full bio here).

Source: Edward Lampert's Baby: Is A REIT Around The Corner?