Sears, Target, Office Depot, Walgreen: Bargains in the Retail Basket

These are notes from the current Value Investing Congress West, written by Jonathan M. Heller.

From the Advanced Seminar on Value Investing, conducted by T2 Partners' Whitney Tilson and Glenn Tongue:

Tilson suggested that although now is not the appropriate time to be long a basket of retailers given the current economic situation, there are some bargains out there. He presented a bullish (and compelling) case for Target (TGT):
• buying back stock ($10 billion buyback program)
• selling credit card ops—(interestingly enough, the news of the sale of 47% of this business to JP Morgan for $3.6 billion broke during the conference)
• Owns a large percentage of its land and buildings—real estate alone may be worth 70-80% of current market cap
• Potential $5.00/share eps 3 years out (stock currently $53)

Tongue presented the bullish case for Sears Holdings (SHLD):
• Repurchased 33 million shares the past 3 years
• Sum of the parts potentially worth a great deal more than current market cap ($13 billion)
• Real estate alone- 250 million square feet- currently being valued at less than $10/sq ft assuming conservative $11 billion valuation of business units
• Trading at significant discount to current $100 price

From Day 1 sessions:

Randall Abramson of Trapeze Capital presented a more technically oriented proprietary method his firm uses to time buys and sells. This unique strategy is based on historical trends and levels of price to adjusted book value, and can be applied to stocks and indices.

Abramson revealed this analysis on a number of stocks, and indices, suggesting that:

• Office Depot (ODP) Ruby Tuesday (RT) and Walgreen (WAG) are significantly undervalued.

• Berkshire Hathaway (BRK.A)(BRK.B) now appears overpriced. (Abramson deserves credit for making such an assertion in a roomful of Berkshire devotees, many of whom were in Omaha last week).

Comments

[valueinvest...:]

I own WAG, but I am in no rush to trade in my Berkshire for ODP or RT. Then again, I have held Berkshire for 10 years, so I am in no rush to sell it at all.

2008 May 07 12:38 PM

[John Pseudonym:]

Sears? Have you visited a Kmart or Sears lately?

They're dumps. The Super Kmart here (In the better part of town) is 10 years outdated with a roof that never stops leaking.

High prices, poor service, outdated marketing..it's a retail disaster.

Sears holdings lost money during the credit boom, now you try to tell me they will make money in a recession?


PS> Look at the their online consumer rating: 1.36 out of 10

That's dismal...I'm predicting bankruptcy.

www.resellerratings.co...

2008 May 07 02:25 PM

[Chungst:]

"This unique strategy is based on historical trends and levels of price to adjusted book value, and can be applied to stocks and indices."

I sorry to say, but that sounds like investing by looking in the rear view mirror. If asset valuation metrics were insane in the past, do we than hope for the return of these insane metrics like some diety worshipped in ancient ways? Perhaps we should read entrails and bones as well. The intrinsic value of a business is based on two valuations -- (a) its liquidation value or (b) its going concern value.

Any sound value investor should heed Mr. Munger's counsel and apply the wisdom of Talk 4 (2nd edition) from his book "Poor Charlie's Alamanck" and just ask the simple question how will a company like WAG survive the pressures of competitive destruction over the long term (i.e. the next 10 years)? I try to look into the future as best as I can and all I can see is that WAG in ten years from now will be a weaker company than WAG today based on the strength of WAG's competitiors, the ongoing competitive landscape in general, etc.

2008 May 07 04:08 PM

[fundmanager:]

I've been to the last three Value Investing Congresses and can tell you that the average return from the basket of stocks recommended has been -13%. Tilson and Tongue are so desperate for speakers that now they're hyping technical analysis. Since when has that been a value investing tool? The stocks recommend by these two in particular have a -27% cumulative return. To top it all off, they have the nerve to charge over $2000 for their conference. What a bargain. Rip off the rich hicks - I guess that's their philosphy. Warren and Charlie must be very sad indeed to see what passes for value investing these days.

2008 May 07 11:31 PM

[fundmanager:]

One final point, I think anyone attending the Value Investing Congress should take the recommendation with a large grain of salt. Essentially, TIlson and Tongue are hedge fund managers using their forum to hype the stock already in their portfolio. Follow these followers at your own risk! Best advice, read Joel Greenblatt's books and do your own homework. You'll come out farther ahead in the end.

2008 May 07 11:33 PM

[pshah:]

I agree with one of the previous posters about Sears - they are probably the WORST run major retail chain out there and I don't see how they can compete with Target or WalMart in any environment. Tongue's arguments just don't hold much water either:
- 'Repurchased 33 million shares the past 3 years' : Yes, at prices much higher on average than today. Shows bad management of cash by the company.
- 'Sum of the parts potentially worth a great deal more than current market cap' : And how do you conclude this? It is such a vague statement, you would think you are listening to a bad politician's press conference.
- 'Trading at significant discount to current $100 price' : Ditto

2008 May 08 06:11 PM