Eddie Lampert's New Stock Picks

by: Insider Monkey

Edward S. Lampert is chairman of Sears Holdings Corporation (NASDAQ:SHLD) and founder, chairman and CEO of ESL Investments. He's a couple of years shy of 50 and has an undergrad degree from Yale. Lampert is also an ex-Goldman Sachs analyst, like Farallon’s Thomas Steyer. He started Connecticut-based ESL Investments in 1988 with $28 million. According to Forbes, he is ranked 316th on the list of the world’s richest people, with an estimated net worth of $3 billion.

Lampert believes in concentrated value investing, which is basically aiming to buy assets for less than what they are worth and to sell them at or closer to what they are worth. Lampert is often compared to billionaire Warren Buffet. Lampert makes concentrated bets and holds them for many years. Some of his biggest investments in the 1990s were IBM (NYSE:IBM) and American Express (NYSE:AXP). Currently his long-term investments are Sears Holdings Corp., AutoNation (NYSE:AN) and AutoZone (NYSE:AZO).

Sears holding shares is the biggest investment of Edward Lampert with 3.5 billion USD invested as of the end of December 2010. Edward Lampert bought the bonds of Kmart during the time of its bankruptcy. Later, the store chain emerged out of bankruptcy on May 6, 2003. The newly established Kmart Holdings Corp. started trading at the NASDAQ stock exchange on June 10, 2003. After saving Kmart from bankruptcy, Edward led the merger of Kmart and Sears into Sears Holdings Corporation. Before the merger of Kmart and Sears, Lampert was holding 14.6 percent of Sears shares outstanding and 53 percent of Kmart. He was also chairman of Kmart. Eddie’s goal in the merger was to seek to leverage the combined strengths of Sears and Kmart to obtain greater long-term value. Lampert believed that there would be a $200 million increase in sales from the cross-selling of proprietary brands. He was planning to cut a $200 million from the cost of goods by using the advantage of larger scale of company and increasing purchase power. He was also planning to obtain $150 million to $500 million savings from transportation and indirect costs by this merger. On the day of the announcement, Sears shares gained 17% and Kmart’s gained 8%. The merger was approved on March 24, 2005.

Eddie’s return from purchase of Kmart shares had been over 600% during the 18 months before the merger. Most people had thought that Sears Holdings would continue to gain upward momentum after merger.

Six years after the merger, the result is not that good. Sears Holdings revenues dropped from $55 billion to $44 billion from 2005 through 2009, according to the most recent report of full fiscal year. In the same period, Wal-Mart's (NYSE:WMT) sales rose almost 31 percent, Target's (NYSE:TGT) more than 24 percent and Macy's (NYSE:M) about 5 percent. Recently retailers have been increasing their revenues but Sears Holdings has not benefited from this increase in the reveneus of the retail industry. In the first three-quarters of 2010, its sales were down about 1.9 percent compared with the same period last year, while the competition moved into positive territory. At the company's annual meeting in May 2010, Lampert stated that "Five years from now, I believe this company, to some people, will be unrecognizable to what it was 30 years ago.”

During the last quarter of 2010, Lampert's ESL Investments' RBS Partners Fund placed new bets on Cisco (NASDAQ:CSCO) by buying 6.44 million shares. He also purchased 2.8 million shares of Gap Inc (NYSE:GPS), 3.8 million shares of Seagate Technology (NASDAQ:STX) and 0.4 million shares of H&R Block (NYSE:HRB) during the fourth quarter of 2010 according to recent regulatory filing.

During the last quarter of 2010, Lampert sold out his Citigroup (NYSE:C) shares. Lampert initially bought C during the first quarter of 2007 at an estimated average cost of $48.62. Lampert sold his C shares at an estimated price of $4.5 by losing more than 90% on this investment. Currently C is trading at $4.9.

Below are Lampert’s all positions at the end of December 2010:

1) Sears Holdings Corp (SHLD): Lampert had $3.55 billion of SHLD shares as of December 31, 2010. SHLD gained 20.4%, outperforming SPY’s 6.4% return, since the end of December. During the last quarter Lampert kept his SHLD holdings constant. Tiger Global’s Chase Coleman has some SHLD shares in his hedge fund too.

2) AutoZone Inc (AZO): Lampert had almost $3.06 billion of AutoZone shares at the end of December. AutoZone lost 3.6% since then. Even though the stock underperformed the market recently, it returned nearly 117% during the past four years. This underlines Lampert’s talent in picking long-term winners. Lampert has reduced his AutoZone shares by 10.37% during the last quarter of 2010. Cantillon also sold Autozone during the last quarter of 2010.

3) AutoNation Inc (AN): AutoNation returned 23.7% since the end of December. Lampert’s $1.75 billion gained nearly $650 million during the last five months. AN is one of the 20 stocks Wall Street analysts expect to fall the most.

4) Capital One Financial Corp. (NYSE:COF): Lampert had almost $313 million of COF shares at the end of December. Lampert initially bought COF during the third quarter of 2008 at an average cost of $41.68. He didn’t start reducing his shares until the first quarter of 2010. He reduced his holding by 5% during the first quarter and 20% in the second quarter. The stock currently trades at $52.11, and managed to beat the SPY’s 21% return since September 2008. John Paulson also has a $650 million position in Capital One Financial. Bill Miller, Ray Dalio, and Andreas Halvorsen are other high profile COF investors.

5) CIT Group, Inc. (NYSE:CIT): Lampert had 3.6 million CIT shares at the end of December. CIT lost 5.8% since then, underperforming the SPY by 12.2 percentage points. Daniel Loeb, Whitney Tilson, David Einhorn and John Paulson also have CIT shares in their portfolios.

6- Genworth Financial, Inc. (NYSE:GNW): During the last quarter Lampert kept his GNW holdings constant . He initially added GNW to his portfolio at the end of 2008, when the stock went down to $1 from $15. Later Lampert added to his position as the stock price was hovering between $1 and $7. Currently GNW trades at $13.72.

7- Cisco Sys Inc (CSCO): Lampert had $130 million worth of CSCO shares at the end of December. CSCO lost 8.2% since the end of December, underperforming the SPY by 14.6 percentage points. Leon Copperman’s Omega Advisors, David Tepper’s Appaloosa and John Burbank’s Passport Capital are other CSCO investors.

8. GAP INC DEL (GPS): GPS has returned 3.7% since the end of December, underperforming the SPY by 2.7 percentage points. Lampert had nearly $63 million invested at the end of December.

9. SEAGATE TECHNOLOGY PLC. (STX): The stock is one of the new investments of Lampert during the last quarter of 2010. Lampert had $58 million in STX shares at the end of December. GPS has lost 7.7% since then, underperforming the SPY by 14.1 percentage points.

10. H & R BLOCK INC (HRB): HRB has gained 18.1% since December, outperforming the SPY by 11.7 percentage points. Lampert had nearly $4.7 million invested at the end of December.

The value of the four new stocks in Lampert's portfolio was $255 million at the end of December. The value weighted average performance of his new stocks since the end of December has been -4.6%, underperforming the market by 11%. These new stocks are still a small portion of Lampert’s $9.24 billion 13F portfolio.

On the other hand, Lampert's value weighted average return of his 13F portfolio has been 11.7% since the end of December, vs. SPY’s 6.4%.

Disclosure: I am long C, SPY.