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Last week we wrote about retail stocks that might interest hedge fund investor and Sears Holding Chairman, Eddie Lampert. During the past week, two of the names on the list, Caribou Coffee (NASDAQ:CBOU) and H&R Block (NYSE:HRB) were very strong performers. While we put the names together as a part of a potential buyout list, each company on the list had a margin of safety. Most names were cheap, based on classic criteria of return on assets, growth and earnings yield. Even Caribou Coffee has a margin of safety because despite it's above average P/E, it has substantial value as a standalone coffee franchise as well as from cost cutting opportunities.

A closer look at previous names

H&R BLOCK (HRB)

H&R Block rallied 5.3% largely on news that Viking Global, managed by 'Tiger Cub' Andreas Halvorsen, accumulated a 5.5% stake in the $5.3 billion market capitalization company. In our previous article, we highlighted H&R Block because of its reasonable valuation, profitable business and the synergistic potential inherent in its expansive footprint of small to medium sized offices. While we thought that H&R Block offered Sears Holding (NASDAQ:SHLD) significant upside, it appears that Viking is sufficiently satisfied with just the cheapness and profitability.

CARIBOU COFFEE (CBOU)
Caribou Coffee is one of the largest coffee shop chains in the country. We highlighted CBOU because we thought it could benefit from an expasion into Sears Holdings' low cost lease space as well as cost cutting opportunities. This past week, the stock rallied 12% on no apparent news and above average trading volume.

While the company deserves a premium because of the dearth of pure play coffee chains as well as the upside potential to strategic acquirers, the company may not be cheap for minority passive investors. In 2003, Starbucks (NASDAQ:SBUX) acquired Seattle's Best Coffee for $72 million. At the time, Seattle's Best had 129 North American cafes, 110 international cafes and extensive wholesale contracts with 12,000 outlets. According to its 10-K, Seattle's Best Coffee generated $63.7 million in sales at its retail cafes and $64.8 million through its wholesale operations. This put the buyout price at 0.56 of trailing sales. Caribou deserves a premium to the Seattle's Best buyout valuation: Early 2003 was a market trough and Caribou Coffee's 534 store network is much larger than that of Seattle's Best. Investors should pay close attention to Caribou and consider buying the stock on weakness.

Other possible names to watch

BEST BUY CO, INC (NYSE:BBY)
Best Buy is a specialty retailer of consumer electronics, appliances, furniture and home entertainment. In 2010, the company had revenues of $49.7 billion and ended the year with 1,069 US stores and 2,453 European stores. Best Buy has a trailing P/E of 9.3, a forward P/E of 7.8 and a PEG ratio of 0.79.

Lampert has already shown a willingness to invest in retail names. While Best Buy may trade at a cheap enough valuation to warrant an investment, there are reasons why a Sears and Best Buy merger could make sense. Online sales and consumer electronics are some of the biggest underperformers at Sears, while Consumer electronics represents around 40% of Best Buy's sales. Best Buy's online sales increased 22% in 2010 vs. the previous year.

Best Buy's large store footprint is also an interesting opportunity for Lampert. It seems that both Sears and Best Buy are looking for additional sales avenues. Best Buy has developed the mall-based Best Buy Express chain, while Sears has long searched for ways to better monetize its Craftsman, Kenmore and other proprietary lines. In a previous article, "Investors Should Not Ignore This New Trend in Retail," we discussed the latest trend as retailers try to drive profit growth by cutting costs through store size optimization.

This would be an ambitous venture, but Lampert is not a shy investor. Best Buy's sizeable market capitalization may preclude a cash purchase, but Lampert may be able to engineer a cash and stock merger.

SYSTEMAX INC (NYSE:SYX)
Systemax is an electronics retailer operating through 41 brick and mortar stores as well as various website brands such as CompUSA and TigerDirect. In 2010, the company had $3.59 billion of sales.

Considering that Sears Holdings spent $441 million in 2010 on capital expenditures, a $500 million market capitalization may seem very manageable considering that SYX's trailing P/E is 10.5 and forward P/E is 7.5. While the low price to earnings valuation would give Sears a margin of safety, the acquisition would provide Sears with a strong online business operator. Lampert has ambitiously pushed to increase Sears' online business. He has also looked for different avenues to promote the company, including through social media.

In addition to the online infrastructure, Sears would also gain access to Systemax's fast growing $1.77 billion of business to business sales. Not only the growth attractive, but this segment also offers a diversification away from the consumer sales.

Disclosure: I am long SHLD.

Additional disclosure: NakedValue.com receives no compensation to write about any specific stock, sector or theme.

Source: More on Possible Eddie Lampert/Sears Holdings Buyout Candidates