Motley Fool: “Investor X and the One of a Kind Value Investment”

by Travis Johnson, Stock Gumshoe | February 11, 2008 11:35 pm

The Motley Fool has a new teaser ad out, this one for the Inside Value newsletter. If you’ll sign up for your subscription, they’ll tell you about this unique investment that they think can double your money.

In the words of their able copywriter, “That’s because the company detailed just ahead gushes cash… is run by one of the greatest value investors of this generation (who we’ll call “Investor X” for now) … And right now, has massive real estate holdings that ‘backstop’ the valuation.”

Now, I’ve got a wise group of readers … and I’m sure some of you can guess the name of this company just from those hints. But there’s more!

There’s a quote from Barron’s that this company has “considerable value that is not reflected in the stock”

And another, from the same article, that it “could have a liquidation value of more than $300 a share.”

They lather on the value credentials for the stock: “by our estimates, this company gives you about $100 cash in your pocket for every single share you own, perhaps more.”

And I just want to excerpt this little section, because this is the key to the argument that this stock is a good investment — the comparison to Berkshire Hathaway (yes, again, another “next Warren Buffett” teaser!):

“It has Investor X at the helm, capable of compounding shareholder value many times over… it has extremely valuable real estate holdings… and a retail component that’s currently printing cash… and it possesses significant turnaround potential.

If the story sounds familiar, you may be thinking about a declining textile mill with enormous cash flow that was bought out by a savvy young investor named Warren Buffett…

Of course that textile mill, Berkshire Hathaway, evolved into a holding company and went on to become the most inspiring investment story of all time…”

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There’s even a quote from the Wall Street Journal to back that up: “The Wall Street Journal published an article a few weeks ago that states Investor X intends for this company ‘to have a structure similar to Mr. Buffett’s Berkshire Hathaway.'”

What else is in the teaser? They take credit for their past “ONE remarkable stock to own now” recommendation, from a teaser email that they started sending out about two and a half years ago (I’ve written about it several times, most recently here[1]). That was a similar teaser in that they also compared that stock (Markel) to a young Berkshire Hathaway.

I wonder, after Warren Buffett passes from this life, will we have to place someone in the cemetery to listen for the high-speed spinning coming from his casket every time someone sells a newsletter that conjures up his ghost?

So the basic investment thesis in this teaser is that we have a master capital allocator (Investor X), who runs a “beleaguered” business, that has massive real estate value — in their assessment, the real estate is worth as much as the current market capitalization of the company.

And that can only be …

Sears Holdings (SHLD)

And Investor X is, of course, Eddie Lampert — hedge fund wunderkind and chairman and major shareholder of Sears (through various invesetment vehicles and personally, but mostly through RBS Partners and ESL Investments, his hedge fund company).

Sears Holdings, which is the combination of Sears and Kmart thrown together out of the ashes of Kmart’s bankruptcy by Lampert, is indeed often referred to as a possible Berkshire Hathaway-type investment, and people certainly believe that Lampert is an excellent investor. I can’t dispute that (though he makes mistakes just like everyone else — he was a heavy buyer of Citigroup last Spring, and of Motorola. And unless you want a punch in the mouth, you probably shouldn’t ask him how AutoNation is doing lately, either).

I also have not done my own analysis of the real estate holdings underlying Sears — the store locations, mostly long term leases, for all of those Sears and Kmart stores. Certainly, when Lampert engineered the merger the shares were a screaming buy, trading for much less than the real estate value. That changed fairly quickly, as the shares shot up in value, and for most of the last couple years they traded in the $130-$160 range, with a bit of a run up to $200 or so last Spring. Now the shares are right at $100.

Essentially, in my view, that real estate and the Kenmore and Craftsman brands are the underlying value of SHLD. Whether you think it’s worth more than that or not depends on whether you think Eddie Lampert will be able to turn Sears around (he’s not the CEO, and in fact he recently installed a new guy in that role, but he certainly can make any decisions he wants about the company).

Now, I’ve been a little bit outspoken in writing about Sears Holdings in the past — I wrote about what I perceived as Eddie Lampert’s failures to follow through on the plan we thought he had for SHLD[2]. And I personally think that Sears is bound to fail as a retailer, but that’s just my opinion. I’m guessing Sears will be on the same junk heap as Montgomery Wards and Jamesway in a few years, but I could certainly — easily — be wrong. It remains a large and well known retailer, just not a particularly successful or profitable one.

The arguments in this letter from the Fool are the same ones that we’ve been hearing about Sears every since Eddie Lampert took control. The problem is, I personally have yet to see any evidence that he has any hope of turning around the core Sears franchise — and I think he has completely missed the opportunity to use Sears’ abundant free cash flow and real estate value to invest in other promising companies or value stocks.

The reason to buy SHLD when it was coming out of bankruptcy, in my opinion, was that Eddie Lampert had the ability to unlock significant real estate value and other hidden cash value in the company. Then, the reason became that he was going to turn Sears into a holding company for his investments — again, reasonable on its face. But so far, all he’s doing with the Sears cash is buying back SHLD shares at prices far above today’s price. If all he’s doing is reinvesting in a dying beast, we need to really hope that beast gets a new lease on life. Either that, or that he has some secret plan to unlock some major value in Sears at some point in the relatively near term — as it is, it appears to me that they’re working on the margins trying to improve Sears, which brings to mind the old adage of the lipstick and the pig.

The Warren Buffett comparison is apt, I think — but they didn’t follow it through to the same conclusion I reached a while ago. Warren Buffett’s investment partnership didn’t really take off, you could argue, until he gave up on pouring money into the Berkshire Hathaway mills and realized that he had to move on to other businesses. When he did that, he ran Berkshire in a way to extract as much cash as possible and, a bit later on, used his cash for the value investments and subsidiaries (particularly Geico) that made him and his early investors so incredibly wealthy.

Personally, I’d draw the comparison and say that Eddie Lampert’s Sears/Kmart is Warren Buffett’s Berkshire Hathaway — a dying business in a very competitive marketplace that still generates quite a bit of cash and has some value. Buffett used the money from Berkshire to buy into much more promising investments. Lampert has been using the money from Sears to buy more SHLD shares.

That’s too neat a package, to be sure, but it’s how I think about Sears — and why I’m not a shareholder. I have been wrong before, and Philip Durell has been right much more often than I have and I generally think he does a good job of valuing companies. He also, however, suffers from the same thing that plagues all value investors, at least occasionally, he sees value in dying businesses and dormant businesses, and some of those won’t end up revitalizing or reawakening themselves. It will be years before a fair assessment can be made of the value of Sears Holdings, but I’ll follow the lead of another prominent value investor, Martin Whitman, whose Third Avenue was one of the largest SHLD shareholders thanks to a big position in Kmart Holdings coming out of bankruptcy … his firm has now sold almost all, if not all, of its SHLD shares (at a massive profit, of course), because, one can only assume, he no longer believes that the company is “safe and cheap.”

This is a very well covered stock — not necessarily by analysts, since they don’t give any guidance, but by the press because of Lampert’s fame and wealth. It’s a compelling story, and I’d like to think that eventually ESL will really turn SHLD into a holding company on par with Berkshire Hathaway. If you still believe, let us know.

  1. most recently here:
  2. wrote about what I perceived as Eddie Lampert’s failures to follow through on the plan we thought he had for SHLD:

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