Monday, 26 January 2009 23:00

Reggie Middleton's Preliminary Opinions on Sear's Holdings

I have released my preliminary findings on Sears Holdings. I will probably have more to say in this sector in about two or three weeks, as well. As is customary, the Pro version has an extended addendum which (this time) includes the macro assumption drivers taken from the valuation model. Sears is a little trickier than I initially assumed, and I am still quite a bit more bearish on the economy than most pundits and economists thus I have included an extensive sensitivity analysis to allow professionals and institutions to see my valuation band influenced by what we perceive to be a swing from a harsh recession to a early recovery throughout 2009 and 2010.

pdf Sears Holdings Research Report - Retail 2009-01-27 01:13:07 50.42 Kb

pdf Sears Holdings Research Report - Pro 2009-01-27 01:11:41 313.25 Kb

Last modified on Tuesday, 27 December 2011 10:14

17 comments

  • Comment Link Reggie Middleton Sunday, 01 March 2009 00:14 posted by Reggie Middleton

    Hat tip to [url=http://boombustblog.com/component/option,com_comprofiler/task,userProfile/user,1680/]Phirang[/url] on this one from [url=http://www.minyanville.com/articles/GS-WMT-TGT-SHLD/index/a/21376/from/yahoo]Minyanville[/url]:

    [quote]Greetings from New York, where I spent last night reading the 20 -age letter to investors sent out by Eddie Lampert to shareholders of Sears Holdings (SHLD). Having recovered from my brief fling with Obamania, I can’t exactly describe myself as disgusted or shocked by the note. That said, for those of you wondering what a person with a complete lack of shame does when communicating with folks he’s cost billions of dollars, you’ve got your answer right here: Sears Holdings IR.

    20 pages, folks. The first 6 pages cite the tough market for retailers in general, noting the bankruptcies of Circuit City, Mervyn’s and Linens n’ Things. Sears is the third largest retailer in America. Eddie’s comparison points are roughly akin to me boasting that I’m in much better health than George Burns.

    Mr. Lampert doesn’t actually address the performance of Sears itself in earnest until page 6 of his report, during which he notes the company’s solid performance in Q4. Showing remarkable restraint, he doesn’t compare this performance to the bravura finish of Our American Cousin (the play during which Abe Lincoln got shot). Mr. Lampert quickly runs through a 5-point plan for turning the business around, using assorted retail truths such as a dedication to “Building our brands!”

    Wrapping the turn-around plan up in 4 pages, the balance of the 20-page letter, nearly 10 full pages, is dedicated to complaining about the uptick rule, pension reform and Mark-to-Market accounting. This is from a man who effectively cashed out to the tune of $5 billion dollars in January of 2007 with SHLD in the high 170s.

    For comparison's sake, in the time since Eddie’s cash out (he put the money in his hedge fund), SHLD had a market cap of around $25 billion compared to the current value under $5 billion. SHLD’s stock has fallen over 80%. During the same period, the S&P 500 is down 37%, Target (TGT) has fallen 46% and Wal-Mart (WMT) is actually higher by 14%. [/quote]

    [quote]Mr. Lampert is well-liked among the money set, to the point that I’ve taken a lot of heat for being critical on the stock since I moved to New York and had the chance to shop a few of the stores. Long-term retail investing is simple. My dad taught it to me when I was 5 and, because I’m a boy, he didn’t sugar-coat it:

    “A dirty store,” Ken Macke told me, “is a f**k-you to the customer”. I’ve never been in a Sears or Kmart that didn’t all but scream that vulgarity at me the instant I walked in. You can say the rule of thumb is too simplistic to be of use - but I’ve never seen it fail. I barely glanced at SHLD’s numbers, I knew Mr. Lampert’s operation was going down the second I had shopped 5 of the stores - and they all welcomed me the same way.

    By my rule of thumb or using more sophisticated techniques, I don’t know a single “smart” who rode SHLD all the way down. It may even be a long trade here - but only a trade. In the long run, the place is doomed. I weep for the shareholders because, by definition, they were too poorly informed to know better than to trust Mr. Lampert to look out for them. I feel bad for the 300,000 employees, some of whom I’ve worked with over the years.[/quote]

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  • Comment Link mocospace Friday, 20 February 2009 00:33 posted by mocospace

    Unfortunately, I am not in a position to be paid subscriber, but I'd be very curious to know what the valuation target for Sears is.

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  • Comment Link phirang Friday, 30 January 2009 11:21 posted by phirang

    I went short AMZN today after the 20% rip off of earnings.

    I think this is an interesting short, since the catalyst is not so much the consumer but BROKE MUNI'S.

    http://hamptonroads.com/2009/01/complaint-amazoncom-should-charge-tax-sales-va

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  • Comment Link shaunsnoll Tuesday, 27 January 2009 19:11 posted by shaunsnoll

    patience and limit orders are key to dealing with greedy options market makers. i've always thought options > shorting unless you are moving big amounts of money, since margin issues and the potential for only 100% profit (unlevered) vs. infinite theoretical potential loss have always made options sound more attractive. i would like to point out that i am in NO WAY an options expert and my advice should not be considered as such.
    2009 WILL be a tough one for everyone though! bear market volatility = stress !

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  • Comment Link victorian Tuesday, 27 January 2009 13:31 posted by victorian

    Shaun -

    The thing I am worried about with options is obviously the leverage. With shorting, even the movement is against you, with sensible stops, you can limit your loss to a large extent. However, with options - the leverage and the bid-ask spread will kill you if you do not have high volume trades on (which is true with most of Reggie's research).

    I guess it all comes down to your level of risk tolerance. The market in 2009 is going to be a very tough one to negotiate for both bulls and bears. I am 80% in cash right now and waiting for a clear signal. S&P 1000 and I am going all in ;D

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  • Comment Link shaunsnoll Tuesday, 27 January 2009 11:54 posted by shaunsnoll

    i never liked shorting more than put options, just because you can have a negative 100%+ return shorting, like say, when this credit freeze even begins to thaw, major acquisitions will occur and that would kick your butt if you were short, but with puts you just lose your put cost. also, you dont' have to worry about all the other stuff going on with your broker, or the dumb government or other stuff. so my comments there, would be to just use options instead of shorting, your account is most likely not so big that it will be an issue. just read one book on options and you'll probably have the basics down enough to get going.

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  • Comment Link shaunsnoll Tuesday, 27 January 2009 11:52 posted by shaunsnoll

    volatility you think is fair for an option is the magic of option trading. thats like asking what price is fair for a stock. so when you figure out an easy way to do that please let me know! :) joking, but in most option pricing models that is the major variable since you already know the strike, the stock price, the time to expiration, risk free rate, etc. the implied vol is the tough one....

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  • Comment Link jarret Tuesday, 27 January 2009 11:50 posted by jarret

    Thanks Reggie as I am interested in finding out more about which platform would be best and if they currently have shares available to short on MAC, FRO and SHLD for example.

    I have an active trader platform with all the bells and whistles and for the most part am happy with Fidelity outside of the fact the never seem to have an shares available for shorting (even outside of your research).

    We have been in Sears several times in the last few weeks as we are washer and dryer shopping (for those of you who have an older model the options they now have are better than my first car) :-) and was constantly amazed by the level of discounted merchandise in the the various departments and how slow business seemed overall.

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  • Comment Link phirang Tuesday, 27 January 2009 11:49 posted by phirang

    Take advantage of high vix, get good leverage, and it's a LOT less stressful than puts.

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  • Comment Link victorian Tuesday, 27 January 2009 11:36 posted by victorian

    Jarret -
    "I currently use Fidelity and the last 3-4 research reports (ie MAC, FRO, SHLD) my broker Fidelity has no shares available to short."

    It is the same with my broker (Ameritrade). And the options are way too expensive, especially on SHLD. Would appreciate if anybody can explain what level of Implied Volatility is deemed to be OK to buy puts.

    .VIX is now around 43. Waiting for it go below 40.

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  • Comment Link Reggie Middleton Tuesday, 27 January 2009 11:31 posted by Reggie Middleton

    It is fair to say that the material on this blog is fairly advanced. I recommend that you use a broker who is also as advanced. They have a better system available to higher volume accounts and RIAs, but I there are better brokers. I would look around to see who has better services. Fidelity is more of a retail brokerage. I don't want to recommend any cos., but I am sure other users will chime in.

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  • Comment Link jarret Tuesday, 27 January 2009 11:25 posted by jarret

    It was interesting as early last year everyone (including all the analysts) had a Q4 2008 recovery....until late Q3 2008 and than it was moved to early 2009 which is now late 2009. My opinion is that we "may" see a recovery in mid 2010 and a lot of things will have to fall into place for that to occur. On a side note, alot of those same folks that are saying late 2009 were also saying that the damage in the financial sector would be under 100B :-)

    No on a more serious note I currently use Fidelity and the last 3-4 research reports (ie MAC, FRO, SHLD) my broker Fidelity has no shares available to short. Just curious which brokers everyone is using and if they currently have any shares available to short on the above 3 names.

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  • Comment Link phirang Tuesday, 27 January 2009 10:43 posted by phirang

    I will not short this until we get the stimulus passed (a formality, but important nonetheless). I can definitely see marginal demand upside if/when the Fed creates a new lending facility for consumer credit and the freshly laid-off get jobs digging holes and filling them again (aka "infrastructure").

    WYNN, on the other hand, has been puuuure profit: all those erstwhile rich people? LOL!

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  • Comment Link shaunsnoll Tuesday, 27 January 2009 10:30 posted by shaunsnoll

    hear that "we expect a recovery in late 2009" yet i never have heard any explanation for this or anything, i feel that people constantly make this same mistake. for instant many people assume that since houses are down huge its "a great time to buy" and that they "must recover" and that once it stabilizes housing prices will rebound. there is no law that just since housing prices are done going down they now must go up! i see the same thing with the end to this recession, every analyst i see out there anticipates a 2H09 recovery, and for what i can see, the only justification is just that are incapable of thinking our current recession could last longer than a year. historically a long, protracted recession like this could easily last longer than that and there have been many stretches of many years where the markets just went sideway. i agree, the imbalances of the past will take longer than a few quarters to work out, and if our gov keeps fu*king this up like they have been, we'll never get out.

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  • Comment Link Reggie Middleton Tuesday, 27 January 2009 10:09 posted by Reggie Middleton

    I was referring to a sensitivity analysis that takes into consideration the possibility of everything from a early recovery to a harsh extended recession. Anecdotally, and personally, I believe that we will experience worse than a harsh recession, but that is my unconfirmed opinion and I try to keep that out of the analysis in order to stay objective.

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  • Comment Link ey192 Tuesday, 27 January 2009 10:06 posted by ey192

    Reggie, do you think there will be an early recovery in the economy in 2009? Or are you referring specifically to Sears?

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  • Comment Link Daedal Tuesday, 27 January 2009 08:44 posted by Daedal

    Sears has always been a horrible company. Every time I went in there I felt as if I was going into a disheveled bedroom. It's worse than Circuit City. JC Penny is another turd - they're opening up more stores! Who shops there?

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