Worst Year Ever: Bill Ackman Or Eddie Lampert?

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Includes: BHC, CMG, HLF, PSHZF, SHLD
by: Jonathan Poland

Summary

Bill Ackman's fund is down for the third straight year while the S&P continues higher.

Eddie Lampert's Sears Holdings continues the downward spiral to bankruptcy proceedings.

Following these two brilliant fund managers has proved disappointing at best, drastic at worst.

Worst Year Ever: Bill Ackman or Eddie Lampert?

Answer: It's a toss up

Bill Ackman has continued to suffer loss after loss with his investments: Valeant Pharmaceuticals (VRX) got crushed, Chipotle Mexican Grill (NYSE:CMG) got crushed, and Herbalife (NYSE:HLF), his much hyped up short, has doubled. In fact, Ackman's fund, Pershing Square (OTCPK:PSHZF), fully divested the stock position in November because he's not an idiot. Instead, he bought the Put contacts, capping his losses, but still aligning his interests squarely with the collapse of the stock. My gripe with Ackman is the way he tried to manipulate and force the hand of "Uncle Sam" to implement punitive regulatory action against the company. An activist will be an activist.

Of course, he's gotta deal with Carl Icahn, who could buy Herbalife outright if he wanted, and has built a 26% long position in the company. I have to believe that by this point Icahn would have found out about any news or accounting practices that would end the company's positive run. The position is just 7% of Icahn's total portfolio, so it wouldn't hit his net worth too hard if he lost the bet.

For Ackman, the story is vastly different. Where Icahn manages mostly his own capital, Ackman relies on the money of others. And it's really hard to keep a hedge fund open when you suffer multi-year losses, especially when the market is up big. A child with a magic marker and the stock section of the New York Times could pick winners right now. That's the scary part going forward.

Herbalife is pyramid scheme. SO WHAT?! Multi-Level Marketing is a thing. It will be a thing forever. Did the company over-promise and under-deliver to a large number of its distributors? Yes. A strong case can be seen in the Netflix (NASDAQ:NFLX) documentary "Betting on Zero" or in the hundreds of research pages Ackman has put out about the company. SO WHAT?! The company makes too much money to stand down and take a beating, so maybe it will take one of the many bubbles that have formed around the economy to bust before HLF drops. Watch for Icahn to exit his position before betting against it though.

Eddie Lampert on the other hand runs a publicly traded organization built on a century of traditions within local neighborhoods around the United States. Sears (NASDAQ:SHLD) was, at one point, one of the most trusted brands in the world, and America's most famous company. Today, it's a penny stock with a market capitalization under $400 million - a failed attempt to combine garbage retailers without changing their perception in the market. Of course, it was meant to be a real estate play with the company owning a massive amount of land.

The company is actually teetering on the verge of bankruptcy as it seeks to refinance $1 billion in debt. Bankruptcy would be good for Lampert. Eddie owns about 48% of Sears' stock, according to the company's annual report, including holdings through his hedge fund, ESL Investments. Lampert holds about $381 million in notes issued to Sears. When the company goes bankrupt, he remains in control even though he loses his equity stake; he's the company's principal creditor.

It's been over 10 years since Lampert successfully brought K-mart out of bankruptcy and combined it with Sears. At the time, he looked like a financial genius on par with Warren Buffett, but even Buffett couldn't turn around a disaster like this. 2018 could mean the start of bankruptcy proceedings, but not the end of Sears. That happened years ago when the retailer simply stopped stocking its shelves or giving a damn about the customer. I'm shocked that the company still generates any sales at all; however, most of which seem to come through its remaining brands Kenmore and Die Hard.

Lampert runs his own money, allowing him to wait longer periods on turnarounds, and he's still a multi-billionaire, so do not feel too bad for the guy. And he could still turn it around. I'm rooting for him.

Who do you think had a worse year? Maybe it was Kevin Plank instead.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.