What Does a 3.5% Stake by Ackman's Activist Firm Pershing Square Mean For Sears?

I'm not going to try and sugar coat the last few quarters for Sears Holdings (SHLD) investors. Let's face it, it's been a tough time lately for shareholders of the retail chain. After an unbelievably strong performance in recent years on the heels of Chairman Eddie Lampert's turnaround efforts, the current economic environment is something that the highly admired hedge fund investor can't control.

The main business at Sears Holdings has been negatively impacted by both sagging spending at the low-end consumer level (Kmart's target market), as well as declining expenditures on new home projects (a big part of the picture at Sears -- think Kenmore and Craftsman). As a result, you can see from the chart below that the stock has been in a real funk since July or so.


Not surprisingly, the weak share price has attracted another very smart value investor. We have learned that Bill Ackman, who runs Pershing Square Capital, has taken a 5 million share (3.5%) stake in Sears Holdings. Given that recent weeks have seen SHLD drop down to the $125 area, from a high of $195 earlier this year, seeing a very successful investor like Ackman coming in isn't surprising, but it has helped boost the stock a bit in the short term. Shares are trading up to the mid 140's right now.

So what does this Ackman investment mean for investors? Well, Ackman has been very successful in retail-oriented investments that often result in him taking an activist approach with management. Investments lately in McDonalds (MCD), Target (TGT), and Wendy's (WEN) have done very well, though the Target stake is new enough that big changes at the company have yet to be fully felt other than in the stock price.

There are two possible reasons we could be excited about the news that Pershing Square has amassed a $700 million stake in Sears; it represents a new investment by a very smart value investor, and it signals that Ackman plans to take a large activist role with the company and management, leading to changes that will unlock shareholder value. I agree with the first reason but am less optimistic about the second.

Obviously, interest in Sears from someone like Bill Ackman strengthens one's conviction that the stock is indeed vastly undervalued. I have believed this for years (and the stock has risen sharply during that time) and my views have not changed despite the stock's poor performance this year.

But still, contrarian investors should still always be looking for things that either reaffirm or contradict their views on a particular stock. This announcement certainly succeeds in reaffirming my confidence in Sears as an attractive long-term investment.

That said, I think the assumption that Ackman will be able to successfully pressure Sears management into making drastic changes is more unlikely than not. Typically, activists investors can put heat on senior management because they own more stock than them. In essence, management is working for those investors and therefore a CEO would not want to anger enough large shareholders that it could cost him/her their job. In the case of Sears though, Eddie Lampert is the chairman of the board and the company's largest shareholder!

Lampert and his hedge fund (ESL Investments) own 46% of SHLD, compared with Ackman's 3.5% stake. How much pressure can realistically be applied given these ownership percentages is unclear. I suspect Lampert has a plan and is going to stick to it, despite a growing investor base (myself included) that wishes he would accelerate some of his plans due to the fact that his core business is facing several headwinds in the current economic climate that are beyond his control. All in all, this news is positive for investors and I agree that Sears Holdings stock represents great value, especially at recently depressed prices.

Full Disclosure: Long shares of Sears Holdings at the time of writing.

Comments

[Gil]

I read that Eddie Lampert had sold off his sears holdings, and that is the rason that the stock has dropped. Is this not true?