Edward Lampert (Trades, Portfolio) is the largest shareholder of Sears Holdings Corp (SHLD, Financial), with a stake of 26.44 million shares in the first quarter of 2015 valued at $1.09 billion. The second-largest shareholder is Bruce Berkowitz (Trades, Portfolio), the founder and the managing member of the Fairholme Fund (Trades, Portfolio). Lampert reported decreasing his stake in the stock in the first quarter. Berkowitz cut his stake by 3% on the quarter to 25.99 million shares held as of the end of March 2015. The fund initiated a position more than five years ago, and during 2014, Berkowitz added the stake to reach 26,545,273 million shares at the end of the fourth quarter of 2014, worth $875.46 million.
Sears Holdings Corp’s shares lost 29.23% in a year-to-date basis, and during the past 12 months, the loss was higher at 37.38%.
The company operates as a retailer in the United States and Canada. It also has a $2.49 billion market cap. A closer look at the company shows several severe warnings. Revenues consistently declined in the past five years, as well as the gross profit margin, which declined at an average rate of 3.6% per year. Also, the Piotroski or F-Score of 2 is considered low, which implies poor business operation. Moreover, the company keeps issuing new debt. Over the past 3 years, it issued $929 million of debt. Considering these warnings, it would not be strange to think that Berkowitz continues to reduce his position in Sears.
Sears has been making some moves in order to improve its business. It has closed more than 100 underperforming Kmart and Sears stores. Further, it has completed the spin-off of its Sears Hometown and Outlet businesses. In addition, it has reduced its stake in Sears Canada from 96% to 51%. Finally, the company spun off its Land's End Inc. business to shareholders.
Despite the closure of unprofitable stores and the evaluation of separating Sears Auto Center businesses, we think Sears still faces strong competition in a difficult environment.
In terms of valuation, the stock sells at a price-to-sales ratio of 0.09 and is close to the 3-year low of 0.08. Despite this, I believe the right decision is shorting this stock, mainly because over the past decade, the firm's revenues have declined from $49 billion to $31 billion. Also, selling real estate properties to a REIT could have ended up better while maintaining better assets.
Another prominent investor who reduced his position was Murray Stahl (Trades, Portfolio). In the first quarter, he reduced his position by 1% to 4.97 million shares.
Disclosure: Omar Venerio holds no position in any stocks mentioned.
