Bruce Berkowitz on Sears Holdings

Bruce Berkowitz of the Fairholme fund discusses his rational for owning Sears Holdings (SHLD) in a recent U.S. News and World Report article title 'A Portfolio Warren Buffett Would Love'. Although I'm focusing on the Sears part of the article, I recommend clicking the link to read the full article.

One of your largest holdings, Sears, has seen its stock price fall by about half over the past year. Do you think Chairman Edward Lampert can turn things around?

I think that he's going to do it. And it's very reminiscent of what happened with Warren Buffett and Berkshire Hathaway in the early days. If you play back the tape, Warren Buffett bought into Berkshire Hathaway, a textile mill, and he took many years to try and turn it around. He had deep respect for the employees; he really gave it his best shot. And then when he realized it wouldn't work, he then started to redeploy the assets and the free cash that was coming out of this industry that was destined to die. And that's how Berkshire Hathaway started.

Sears is the same situation. Sears has a great real-estate portfolio, and people are behaving as if it can only be used as retail space. And they have brands; some of them are quite good. The company has over $50 billion of revenue and is making money, and people are acting as if it's a company that's bleeding to death. People aren't looking at it in the right way. They are measuring it based as a retailer, and they are measuring it based on short-term net income profitability. But there are many more dimensions to Sears. Real estate can have a higher and best use. Today's anchor to a mall can be tomorrow's multipurpose, multiuse building where you can have office buildings, retail, and residential spaces.

Of course, the best thing that could happen would be that he turns around Sears and Kmart and it's a grand-slam home run. The worst thing that happens is he gives it his best shot and starts to find higher and better uses for all of the assets, from land to trademarks to online. If you can see three or four different ways where you can make an awful lot of money with a guy who has a record of making an awful lot of money, it's not such a bad thing.

Comments

[mdhobbit:]

Those who have followed the investments of Ed Lampert and Warren Buffett, aside from PR flaks hired to promote a "comparison myth" between the two, would find little to compare. The operational mess at Sears/KMart has been compounded by store investment and personnel decisions that make the real estate the most likely remaining value, and that is nor likely in the existing market.

2008 Mar 04 10:19 AM

[whisperonth...:]

Although Sears Holdings may be a very good stock, I once had Kmart and lost most of what I put in when it went bankrupt. This current downturn may be just another dip like the ones all the other stocks are facing but personally I'd rather not get into it. Once burned, and all that.

2008 Mar 04 08:32 PM

[Iditarod:]

First of all, thanks to seekingalpha and the community of quality posters. Good stuff.

Poster mdhobbit is right. And how about quantifying this vaunted real-estate value if it's so great? Why do I doubt it, given the attention Lampert has received?

As a substantial FAIRX holder, Berkowitz's comments sound disturbingly un-Buffett-like. Paraphrasing his SHLD analysis: "Hey, there are so many ways to make money on this deal. It's either great or really great. I don't see any risk here." That's ridiculous. Why doesn't he display some balanced acumen (which, a-la-Buffett, creates long term confidence, not a just short-term hoped-for price movement via chatter) with points about risk or where his thesis has failed thus far? Don't other retail operations have valuable real estate? Come on. The "DieHard" brand? Get real. What a commodity. And as far as appliance brands, "Kenmore"? Seriously? Maytag had a wonderful brand name and recently went belly up. I don't see anyone clamoring to pay anything for that "brand equity". Brands ain't cash flow, friends. FAO Schwartz, anyone? PanAm? A million others... FYI, examples of actual brand value: GEICO. Coke. American Express. Hmmmmmm....

Further synopsis: "Hey, Buffett bought a dying business and that was the start of his greatness..." Wow, that's illogical. No, Buffett dodged a bullet, and through skill and luck turned his holding company around with other investments. That's what he says anyway. Looking back, he never would have bought Hathaway; he'd have begun with the subsequent investments, no doubt. Banging your head on a rock and then finding a quarter on the ground doesn't mean you should go around banging your head on rocks.

Another Lampert-Buffett comparison point: Buffett never ran businesses. Lampert is trying to be a retail guy. Good luck with that vs. Wal-Mart, Target, Sears, Penneys, Lowes, Kohls, etc. etc. Also, Lampert is a young billionaire with a massive appetite for the high life, while at a similar age Buffett was just getting started with Hathaway, wearing rumpled suits and polyester-blend shirts in Omaha and eating gelatinous processed turkey sandwiches on white bread for his working lunches - very symbolic of a celebrity investor vs. a worker.

Lastly, look at Lampert's language; alternatively defensive, aggressive, frustrated, self-righteous...very, very un-Buffett-like. Despite his phenomenal track record, Berkowitz too is starting to sound more like Lampert than Buffett. Advice to Berkowitz: Re-read a few Buffett shareholder letters and balance out the commentary so your shareholders can learn something. Thanks then. Oh, and remember to thank your shareholders every time you deposit a paycheck, not the other way around. You are in a privileged position through skill and luck. Keep that ego strictly in check, or your investment results will falter.

I daresay you owe your shareholders a detalied explanantion of your SHLD analysis, given the eroding value, rather than a Lampert cheerleading session.

2008 Mar 13 11:13 AM

[Will Morris...:]

Hey, Idiotrod. Are you just going to post this on every Sears article? How does this help you in anyway? Get a job. Most people buy mutual funds so that they don't have to worry so much. Your whining is anything but constructive. Pansy.

2008 Mar 13 07:45 PM