It’s been a while since the last one…
Even after coming way off its highs of last year, Sears’ stock is trading at the nosebleed valuation of more than 26 times this year’s expected earnings. In comparison, discount retailers such as Wal-Mart Stores (WMT) and Costco Wholesale (COST) — both of which reported higher same-store sales in September, even as consumers deserted other stores — are trading in the mid-to-high teens. Not to mention lower profile retailers like TJX Cos. (TJX), whose chains draw brand-conscious consumers looking for a bargain, which is trading at a multiple of about 11.
Part of the reason for the anomaly could be Sears’ inclusion on the no-short sale list; indeed Thursday, after the ban expired, Sears fell sharply. Sears also benefits from a relatively small float, as several loyal investors have stuck by controlling shareholder Eddie Lampert. And the company has been steadily buying back stock, even as cash generation has slumped.
At some point, though, the faith in Mr. Lampert displayed by these investors may start to crumble. Recessions are the ultimate in Darwinian exercises for retailers. Every time there’s a severe economic downturn, a smattering of big and small retail chains go bankrupt. Recent months have already seen a handful of specialty chains file for Chapter 11 bankruptcy protection, including Steve & Barry’s, Linens ‘n Things and Mervyn’s. Others, like electronics chain Circuit City (CC) and drug store operation Rite Aid Corp. (RAD), face serious challenges. Sears’ prospects in an extended downturn aren’t much better.
OK…So let’s for a minute just sit back and reflect the inclusion of cash rich (it currently holds more cash that all the other combined), low debt (it currently has less than any of the other did) Sears with any of the above retailers. Why not look at is next to Macy’s (M), Kohl’s (KSS), JC Penny (JCP) or even Home Depot (HD)? My guess is the article would then have been far less dramatic or interesting as people would have come to the logical, “well, all of retail is suffering now” conclusion.
What the author alludes to but chooses not to focus on is that unlike at the above, Sears is still churning out profits and cash flow. He does note that Sears tumbled today after the “no short ban” was lifted. A 680 point drop on the Dow today would lead some to believe that perhaps this was not a “Sears specific event”?
The Sears shareholder base. This has merit. 86% of the shares are held by investors who typically have a holding period measured in years. In fact, Chairman Lampert himself controls 51% and isn’t going to be selling anytime soon. So, aside from the “naked shorting”, of Sears shares (IS THE SEC’S CHRIS COX STILL ON THE JOB?), in any given day only about 14% of the shares are going to be sold by anyone other than those who view purchasing a stock as “ownership”, not trading paper.
That math ought to lead anyone to conclude that there isn’t a ton of downside to shares, or , if there is, based on the reputations of the investors that hold shares, they most likely will eagerly be snapping them up.
Sears is a complicated investment both due to the various businesses and parts it has, and its evolving ownership base. A true “why isn’t it going down” analysis really cannot honestly be done in a pithy 3 paragraph piece…
When you have a stable investor base that is not inclined to sell, many of the usual daily market machinations and their effect of the stock price tend to not matter as much. That by the way, is a good thing…
I just may have avoided the 23% drop this month in the Dow..
Disclosure (“none” means no position):Long SHLD, none
Visit the ValuePlays Bookstore for Great Investing Books
