investary's  Instablog

Many believe that Sears (SHLD) is dead with its horrible management team to turnaround the company. Many see Sears and Kmart as a dead retail chain which is losing market share in the retail space. While I agree with both of those statements, I see some intrinsic value in this stock that make it worthwhile to purchase this stock at the $30's range. Currently Sears Holdings is worth just less than $5 billion dollars and tanked on the latest earnings report which was actually not as bad as what many think. The stock reported a loss of $1.99 which was lower than the expected $2.55. However the looking forward statements does not look appealing for this company. Sears Holdings earlier this year closed many stores and this actually brought much more value to the company. The head of the company, Eddie Lampert, is heavily bullish on this stock with 23 million shares which is a good 30% of the company (This does not include hedge fund stake). While the company has not done much, the real thing that Sears needs to do is able to close more stores and rent out their property. Sears is much more of a real estate play with over 256 million square feet which is greater than Simon Properties (SPG) which is valued at $48 billion.

(click to enlarge)

The retail Sears is fundamentally weak and if management team does not close more stores it will continue its loss. They have already reported a loss for the last 23 consecutive quarters however Sears can gradually cut down its loss by closing more stores and renting out their property. There are tons of other retail companies who would be willing to pay for such space. I also believe that Sears does not have the right team assembled to change Sears retail anymore. Again, Sears has lost their appeal to all their audiences with people occasionally going there for tools once in a while. It will be harder for the company to change their retailing strategy as many competitors are other there to compete with their wide selection. If Sears really wants to turn the company around it must close many more stores out of the couple thousands that they own and able to limit their inventory with the remaining stores. Sears has lost its focus due to the amount of inventory that they cover. They go from clothing to electronics to appliances without specialization in a certain field. This is what makes many investors worried about the future and the stock is fundamentally really weak. This is what I am fundamentally betting on for the company. The last time the stock has reached around the $30s range was in the worst of the financial crisis and just earlier this year. However, I see a similar resemblance if the stock reaches the $30s that their will be a good amount of short squeeze. The company has around 30% of short interest which can mean any big announcement in the company can make the stock rally. This company is completely under Lampert's control and from his recent transactions he is very bullish on the company. Lampert recently purchased around 100 million shares @ $52.75 around early September of this year. The problem is while he is bullish, many other investors are not and this is leading to a downward spiral in the company.

(click to enlarge)

As for analysts out there, there has not been much coverage of this stock. There are a sell and holding rating on the stock, which makes a lot of sense with all the problems in the company. The company's average volume is at a mere 1 million. One of the most noticeable investors is RBS Partners which owns a tremendous 1/3 of the company. RBS Partners is basically managed by Lampert and it truly shows how bullish he is on the company. There are ESL investments and Fairhome Capital Mangement also owns a good amount in the company however the reasons of their stake are not exactly clear however they are definitely bullish in the company.

I believe that investors do have multiple good reasons on being bearish on this company. The company needs to get its act together (somewhat like Nokia earlier in the summer) and it will be able to make investors much more confident on what they are looking at. I see some value in the company especially since the book value of the company is $30. Sears has only lost money on the sale of property once in the course of its business. This shows that the company still has inventory and property that are worth a significant amount. Investors who are looking to get into Sears do not to be in a rush as the company will take some time before any significant move will occur. We see that Lampert has true confidence in the company and for the most part buying this stock is to have a lot of faith in his abilities to turnaround this company. Have patience and wait for the low $30's and high $20's if it reaches that low to consider buying the stock. The company has a lot of value but it has not been achieved because of the continuation of having stores open. As Albert Einstein once said, the definition of insanity is doing the same thing over and over again and expecting different results.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.