Why I Closed My Sears Long Position

| About: Sears Holdings (SHLD)


There is no timeline on a catalyst to correct SHLD stock value to its intrinsic sum of the parts valuation.

Real estate may be worth $100 a share but there is no time horizon on when/If it will ever be monetized.

There are other investment opportunities that have more catalysts to correct current stock price to intrinsic value.

Only recent catalysts have been hedge funds taking large positions in the company, earnings have not functioned as catalyst because EBITDA trends are horrific.

Lands End spin-off removes one of only lucrative segments.

Situation: An investment in Sears (NASDAQ:SHLD) at these prices is contingent on the value of the real estate portfolio. Baker Street in its presentation projected a real estate portfolio valuation of $8.6 billion, which sounds terrific in theory, arguing further that most of that value is concentrated in Sears's top leased and owned properties. However, there is no definitive timeframe on when this realization will occur.

Hedge Funds May Just Be Short Squeezing: Although I have not had conversations with the investors long SHLD, it is a possibility that given the high short interest and limited float that they are simply trying to orchestrate a short squeeze. Approximately 90% of investors in SHLD are institutional investors or index funds. As a fundamental investor the stock has not been a good investment, over the past year the stock price has barely moved, while the market has been skyrocketing. There are not definable catalysts with approximate time frames so I see little very motivation to hold the stock. I would not short the stock either because of its unusual ownership structure and if the catalyst does occur there is huge downside.

Why SHLD Could Double: If SHLD liquidates tomorrow and Baker Street's valuations are correct than the stock could easily double but I have no information on the real estate valuations and would simply be relying on others analysis which is a mistake for a prudent investor. Additionally, other valuations of the real estate have be placed near current equity value.

JCP Closings Provide Information: JCP recently closed 33 stores in the first quarter of 2014 incurring pre-tax charges of $26 million in the current quarter. This is relevant because one it shows that there will be likely substantial costs in monetizing SHLD real estate. Secondly, there will also now be more supply for real estate, which is likely responsible for holding up current prices in contrast to demand factors.

Sears As A Retailer Is Overvalued: In order to derive an intrinsic value for sears as a going concern, Gary Balter, a prominent sell side analyst covering the stock, utilized a 10X multiple (slight discount to retailers, offset by underlying asset value) on 2014 adjusted EBITDA to derive a price target of $20 for Sears as a retailing business, approximately half of the current price. Additionally ShopMyWay is showing increased users and engagement but this is not like Amazon Prime which charges, so there is no indication people truly value the service.

Eddie Lampert Recent Increase In Ownership: Eddie Lampert disclosed the acquisition of 623,462 common shares through an investment in SPE. Eddie Lampert is a very bright man but very bright men have been wrong in the past. Additionally, who knows what Lampert's timeline for this company is, it could be 5-10 years from now, in which case a stock doubling when computed on an annualized basis is much less impressive. Additionally, Jeffrey Balagna Sears CIO and EVP recently sold a meaningful 20% of his position at approximately $38 a share, not a strong boost of confidence.

The sears long case is an interesting mental exercise but its entirely up to Eddie Lampert when he wants to take action to actually increase shareholder value and billionaires are not in a rush or else Sears would have already began liquidating. Lampert may want to give an asset light retailer a try but I am passing on that ride.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not meant to be a comprehensive analysis but meant to encourage Sears investors or prospective investors to conduct more analysis on these issues

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