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Charles Sizemore
Charles Sizemore
Articles (507)  | Author's Website |

Is Sears the Next Berkshire Hathaway and Eddie Lampert the Next Warren Buffett?: SHLD, BRK.A, BRK.B

December 28, 2011 | About:

A well-respected value investor buys an old American company in decline, promising to restore its fortunes. Alas, the recovery never comes. The economics of the industry have changed, and the company cannot compete with younger, nimbler rivals. The company ceases operations, but the value investor holds onto the shell to use as an investment vehicle.

Could this be the future of Sears Holdings (NASDAQ:SHLD) under Eddie Lampert? Maybe; maybe not. But it was certainly the case for Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A)(NYSE:BRK.B).

Unless you’re a history buff or a dedicated Buffett disciple, you might not have known that Berkshire Hathaway was not always an insurance and investment conglomerate. It was a textile mill, and not a particularly profitable one. It was, however, a cash cow. And after buying the company in 1964, Buffett used the cash that the declining textile business threw off to make many of the investments he is now famous for, starting with insurance company Geico.

So, when hedge fund superstar Eddie Lampert first brought Kmart out of bankruptcy in 2003, the parallels were obvious. With its debts discharged, the retailer would throw off plenty of cash to fund Lampert’s future investments. And even if the retail business continued to struggle, Lampert could — and did — sell off some of the company’s prime real estate to retailers in a better position to use it. Lampert sold 18 stores to the Home Depot (NYSE:HD) for a combined $271 million in the first year.

That Lampert would use Kmart’s pristine balance sheet to purchase Sears, Roebuck, & Co. — itself a struggling retailer — seemed somewhat odd, but his management decisions after the merger seemed to confirm that his strategy was cash cow milking. Lampert continued to talk up the combined retailer’s prospects, of course. But his emphasis was on relentless cost cutting, and he invested only the absolute bare minimum to keep the doors open. Sears Holdings didn’t have to compete with the likes of Home Depot or Wal-Mart (NYSE:WMT). It just had to stay in business long enough for Lampert to wring out every dollar he could before selling off the company’s assets.

The strategy might have played out just fine were it not for the bursting of the housing bubble—which killed demand for the company’s Kenmore appliances and Craftsman tools—and the onset of the worst recession in decades. With retail sales in the toilet (and looking to stay there for a while), there was little demand among competing retailers for the company’s real estate assets.

It’s fair to blame Lampert for making what was, in effect, a major real estate investment near the peak of the biggest real estate bubble in American history. But investors frustrated by watching the share price fall by more than 80 percent from its 2007 highs have no one to blame but themselves. Anyone who bought Sears when it traded for nearly $200 per share clearly didn’t do their homework. They instead were hoping to ride Lampert’s coattails while somehow ignoring the value investor’s core principle of maintaining safety by not overpaying for assets.

Lampert is a great investor with a great long-term track record, and there is nothing wrong with paying a modest “Lampert premium” for shares of Sears Holdings. If you like Lampert’s investment style but lack the means to invest in his hedge fund, Sears may be the closest you can get. But at $200 per share — or even $100 — the Lampert premium had been blown completely out of proportion. The same is true of Buffett, of course, or of any great investor. As the Sage of Omaha would no doubt agree, there is a price at which Berkshire Hathaway is no longer attractive either.

This brings us back to the title of this piece — is Sears the next Berkshire Hathaway?

I would answer “yes,” but not necessarily for the reasons you think.

Everyone assumes that Buffett’s decision to buy Berkshire Hathaway was a typical Buffett stroke of genius. Nothing could be further from the truth. In fact, Buffett revealed in an interview last year that Berkshire Hathaway was the worst trade of his career.

If you cannot view the video above, please follow this link: “Buffett’s Worst Trade
We like to think of Warren Buffett as the wise, elder statesman of the investment profession, but Buffett too was young once and prone to the rash behavior of youth. He had been trading Berkshire Hathaway’s stock in his hedge fund; he noticed that when the company would sell off an underperforming mill, it would use the proceeds to buy back stock. Buffett intended to sell Berkshire Hathaway its own stock back for a small, tidy profit.


We've all been there, Warren.

But due to a tender offer that Buffett took as a personal insult, he essentially bought a controlling interest in the company so that he could have the pleasure of firing its CEO. And though it might have given him satisfaction at the time, Buffett called the move a “200-billion-dollar mistake.”

Why? Because Buffett wasted precious time and capital on a textile mill in terminal decline rather than allocate his funds in something more profitable — in his case, insurance. Berkshire Hathaway will still go down in history as one of the greatest investment success stories in history. But by Buffett’s own admission, he would have had far greater returns over his career had he never touched it.

So, in a word, “yes.” Sears probably is the next Berkshire Hathaway. And investors who buy Sears at a reasonable price will most likely enjoy enviable long-term returns as Lampert’s plans are eventually realized. But Mr. Lampert himself will almost certainly come to regret buying the company — if he doesn’t already.

About the author:

Charles Sizemore
Charles Lewis Sizemore, CFA is the chief investment officer of Sizemore Capital Management. Please contact our offices today for a portfolio consultation.

Mr. Sizemore has been a repeat guest on Fox Business News, quoted in Barron’s Magazine and the Wall Street Journal, and published in many respected financial websites, including MarketWatch, TheStreet.com, InvestorPlace, MSN Money, Seeking Alpha, Stocks, Futures and Options Magazine, and The Daily Reckoning.

Visit Charles Sizemore's Website

Rating: 2.9/5 (42 votes)


Karthikpm - 5 years ago    Report SPAM
Except that when you bought BRK you got exposure to the entire portfolio of WEB. If you buy SHLD, all you get is exposure to the declining retailer not to Lampert's fund
Superguru - 5 years ago    Report SPAM
Karthikpm makes a very good point. It makes Charles Sizemore's SHLD thesis untenable unless we are missing something.
Fareastwarriors - 5 years ago    Report SPAM
The author is implying that Lambert will merge Sears into his hedge fund operations or vice versa and run them as one vehicle.
Superguru - 5 years ago    Report SPAM
Buying SHLD on the hope that Lambert will merge Sears with hedge fund and whole thing will trade under SHLD would be gambling and not investing.
BlueHorseShoe82 - 5 years ago    Report SPAM
I think you mean Lampert, not lambert. Too much american idol, man! Jk
Fareastwarriors - 5 years ago    Report SPAM
Thank you, Lampert. Is like Bruce Berkowitz and St Joe, the next Berkshire too?
Itznuthin1 - 5 years ago    Report SPAM

Sears was stripped of its cash flow and now sits on overvalued illiquid real estate assets. I would NOT invest or even speculate in these guys. Lampert at the head or not.
AlbertaSunwapta - 5 years ago    Report SPAM
"Overvalued" real estate? So what would Sears various assets be worth if liquidated today?

Instead of staying away from this, pricing like this gets me interested.
Noblepaladin - 5 years ago    Report SPAM
There is no advantage in using Sears as an investment vehicle. Even Buffett himself said that if he could do it again, he'd put everything inside GEICO because there are advantages to using an insurance company as an investment vehicle (the longer term capital of cheap insurance float). You don't want the creditors of Sears to have a claim on your good businesses/operations. You want the holding company to be your prime assets, so if the lower quality subsidiaries fail, you can simply punt and let it go.

Jonmonsea premium member - 5 years ago
Well, Berkowitz commented that SHLD has $90 per share in real estate. If he was off by 50%, and SHLD is forced to issue shares at $30/share, you would still likely make money. In terms of bankruptcy, since Lampert owns so much, I think bankruptcy is unlikely, although dilution is a possibility. Then, figure their $8 billion in inventory is worth only $1 billion. I mean, as a value investment it does have appeal, esp. with their large revolving credit facility.
AlbertaSunwapta - 5 years ago    Report SPAM
I'd be concerned that Sears could get into a position like Kodak having very valuable assets that no one will rush to buy because the market participants see the assets as getting cheaper and cheaper with time due to the company's liquidity issues.
Batbeer2 premium member - 5 years ago
You don't want the creditors of Sears to have a claim on your good businesses/operations.

If memory serves, SHLD bonds do not come due before 2018.
PHILCIR - 5 years ago    Report SPAM
Im buying Puts -- this is a $15 stock. Think berkowitz is puking up his position or buying more, ha ha!!!! The death spiral has started......it won't be long till they file for chp 13. I give em 6 mos. at best.
AboveAverageOdds - 5 years ago    Report SPAM
Salient point Batbeer2. Its also interesting/crucial I think to make a distinction between the encumbered and unencumbered assets as far as the retail ops are concerned. All of the analysis going around is the same old same old and almost awesomely devoid of this distinction (and its a distinction that makes all the difference in my opinion).
David Pinsen
David Pinsen - 5 years ago    Report SPAM
About a week before Sears's most recent tumble, there was a warning sign. Interestingly, this same warning sign appeared with another Berkowitz holding, BAC.
Windplayer13 - 5 years ago    Report SPAM
PHILCIR, be careful buying puts at this time. Even if the stock is going down further, the price for puts is very expensive due to the huge increase in volatility.
AlbertaSunwapta - 5 years ago    Report SPAM
Isn't any risk of default very remote? Won't the market just look at Sears as being in slow liquidation, and in good hands, and so value it fairly highly as such?

The way I see it, is that Lampert picked up an old classic, say an old Rolls Royce. However, rather than trying a full resoration job, he's tinkered with the engine to get it running more efficiently, all the while letting the rust spread and now faces selling it off for parts. ...and it comes with its own well located parking stall ( large enough for three smart cars ).
Grol1971 premium member - 5 years ago
Berkowitz have been doing business with people at BAM, who are important real estate players. He spoke very well about them. Could Berkowitz bring BAM into St Joe and Sears in order to develop both asset portfolios? Having Sears shareholders like Lampert and Berkowitz it seems too passive just to have a slow liquidation strategy. These guys have access, knowledge and resources to make money from valuable assets.
Ramands123 - 5 years ago    Report SPAM

Looks like a value bet. However i think there are so many solid companies going for discounts to book value that relatively Sears might not be that appealing.

I think Warren said when good managment takes over business of bad economics its usually the latter that wins.
Superguru - 5 years ago    Report SPAM
"I think Warren said when good managment takes over business of bad economics its usually the latter that wins."

In case of SHLD and BAC, I am not yet convinced that management is good either.
Itznuthin1 - 5 years ago    Report SPAM

AlbertaSunwapta: "Overvalued" real estate? So what would Sears various assets be worth if liquidated today?

Yes, the real estate in my opinion is overvalued. Its hard to value what Sears various assets would be worth if liquidated because Real Estate is a fairly illiquid asset. This isn't pre 2007 and I'm sure companies like Home Depot are not interested in purchasing more real estate from Sears. These guys are bleeding cash at a rapid pace. This reminds me of a Mohnish Pabrai investment. Lots of hard tangible assets that are fairly illiquid.

3for5spotshooter - 5 years ago    Report SPAM
The core Buffett holdings are compulsion and addiction based products (Coke, Geico etc.) The core Sears holdings are a retail store that is in decline - Sears - and a store that has to compete with the dollar stores - Kmart - what's to like?
AlbertaSunwapta - 5 years ago    Report SPAM
Doesn't Sears have brands, lands, technologies and customers related to credit cards plus a couple distribution systems including its web/mail order presence?

I believe the lands may be suffering from low current values but their intrinsic value may prove to be much higher.
Simbadb - 5 years ago    Report SPAM

Pay attention people. The Kenmore, Craftsman, Diehard brands have been stripped out of the parent and called (KCD). Bonds(1.8 Billion) were issued for this entity and are held by an insurance sub domiciled in Bermuda. (KCD) is deemed intelectual property and SHLD pays (KCD) a fee to utilize this property (Kenmore, Craftsman, Diehard). (KCD) is fully seperate and protected from SHLD bond holders.

So the value you thought inherent in this rapidly declining, irrelavent retailor has gone POOF.

Now I imagine all EL is hoping for is to generate enough cash to weather the real estate downturn so he can BK the operations, liquidate the real estate add the proceeds to the cash he will then generate from the sale of (KCD) bonds, Keep the brand names of Kenmore, Craftsman and Diehard and distribute these lines through other distributors.

Slick Financier WINS again. You LOSE.

Sorry Charlie.
Superguru - 5 years ago    Report SPAM
"(KCD) is fully seperate and protected from SHLD bond holders."

and no bond and stock holders contested that in court?

AlbertaSunwapta - 5 years ago    Report SPAM
Doesn't Sears still own the bonds and didn't the transaction creditor proof those assets?

Avoiding the Kodak conundrum regarding patent sales.

Note, I own some SHLD shares but since the position is at the third decimal as a percentage of holdings I'm admittedly quite ignorant of the company. At these prices though I would sure appreciate any insight anyone can provide on the value here.
AlbertaSunwapta - 5 years ago    Report SPAM
An old article on the bonds...

The New Alchemy At Sears

It has quietly created $1.8 billion in securities based on Kenmore, Craftsman, and DieHard


Superguru, your thoughts on where this leaves the common shareholders? A higher creditor claim on remaining assets putting the common at greater risk of loss?
Superguru - 5 years ago    Report SPAM
"Sears' brand bonds are worrisome in one sense, say securitization lawyers and accountants: The company has put the ownership of its three core brands out of the reach of existing bondholders if the retailer ever ends up in bankruptcy. "Lampert has mortgaged Sears' crown jewels," says Thomas Lys, an accounting professor at Northwestern University." - from the same business week article.

These advanced techniques are beyond me. Not something I can understand.

MBIA did something similar and even Marty Whitman, the guru in these things, got burned. I personally would stay away from Sears and leave it to professionals like Marty Whirman.

If I had to gamble my money I would prefer BAC over SHLD any day. I am using Sears as learning tool and have no interest in investing in it. Many people will make good money in Sears but not at my cost.

It is intriguing to figure out what Lampert's end game is. I would guess he already made his money on it. Also I know now that gurus fail quite often.

Simbadb - 5 years ago    Report SPAM
There you have it. This is not NEWs but it certainly has been under- reported. I cant tell you how many times I (like most of us) have heard people yammer about the value to SHLD of those brands. The brands, at least "Craftsman" where trademarked years ago. In fact, in my view the "brands" so to speak have limited value beyond the SEARS distribution channel for as we know SEARS has no part in there manufacture. But, perhaps they would be percieved as a "brand" if sold through another channel. Not to those of us who know of course. example; why pay more for a Diehard battery when you know an Interstate is the identical item or a Kenmore...Whirlpool etc.

In any event, this seems to be where EL saw the ultimate value in SEARS. He has invested little in retail operations and appears to be willing to just let it wither and then liquidate the assets. While it seems and I will say it; im my view stealing the Crown Jewels of the company.

I am sure it is not illegal but it sure as he$$ seems unethical.
Jk815 - 5 years ago    Report SPAM
their will never be another warren buffett
Augustabound - 5 years ago    Report SPAM

their will never be another warren buffett

You didn't post here a couple of years ago under the handle, "commodity", did you? ;)
Sivaram - 5 years ago    Report SPAM

I don't know much about the Sears story but securitization of KCD doesn't seem too unusual. It comes down to who owns the KCD subsidiary. The bondholders don't own it; bonds are just liabilities that need to be paid off. Who owns the KCD subsidiary equity? I have no idea but I think the Sears Holding still owns the KCD equity, and if so, shareholders still own KCD.

The ones that probably lost some value with the KCD securitization are the Sears bondholders, not the shareholders.

The only way Sears Holdings shareholders would have lost is if KCD was transferred to this new subsidiary at really low (below market) values and to someone other than Sears Holdings.
Sivaram - 5 years ago    Report SPAM
GROL1971: "Could Berkowitz bring BAM into St Joe and Sears in order to develop both asset portfolios? Having Sears shareholders like Lampert and Berkowitz it seems too passive just to have a slow liquidation strategy. These guys have access, knowledge and resources to make money from valuable assets."

You may have to liquidate if the business isn't competitive. At some point, some companies, and whole industries at times, become obsolete or enter a permanent decline. Bookstores are an example of that.

Retail isn't going to dissapear but Sears may. If Sears really can't compete, it has to liquidate. And since it is such a massive company, it will enter a slow liquidation IMO. It doesn't matter who is running the company or how good they are -- they will have to liquidate in such a scenario!

The problem with Sears is that it is facing macro headwinds. First of all, it is heavily influenced by housing and its profitability will be abnormally low until housing turns around. Secondly, it is quite possible that retail real estate may be in a bear market. Some, such as me, think there may be too many retail stores and, if anything, you are going to see stores closing (think of Blockbuster, bookstores, Sears, Home Depot, maybe Best Buy now, etc). That is going to depress retail real estate so Sears really can't do anything on the real estate front until that situation is sorted out.

The stock price isn't going to be cheap if the macro picture looked better. But if you were going long here, you better be sure that the macro picture improves -- either appliance sales increase due to household formation, or commercial/retail real estate enters a boom.
Simbadb - 5 years ago    Report SPAM

Non of us know how accurate the article is but assuming it is, it seems many should re-read it.

Claiming brand names as intellectual property is imdeed unusual. Why have royalties for these names being paid by SHLD to the insurance sub? Looks to me as simply a further move to drain cash away from the parent just like spending precious cash holdings, company funds on stock buybacks.

This appears to be far more than, clever finance.

David Pinsen
David Pinsen - 5 years ago    Report SPAM
Here's the tl:dr version of how high optimal hedging costs were a red flag for SHLD longs before its recent 30% drop.

Happy New Year, everyone.
PHILCIR - 5 years ago    Report SPAM
Doesn't Sears really boil down to them having all of their customers siphoned away by the competition? Back in Sears hay days their customers were all the folks who are now shopping Target, Wal Mart, Home Depot, etc...... I think its that simple. 1. Sears has no customers. 2. What is the chance of them getting a good chunk of them back?

All that noise about RE valuation, brands, intellectual property and the other stuff is where the true speculation lies. that's nothing more than guess work. I'm buying puts and will do so because I think Sears has entered its death spiral phase. Very similar to EK which is trading at $.68. Sears could be finished by summer. We've seen it before when the end comes really fast. In liquidation its probably somewhere around $8 - $12 tops. This was nothing more than a good story. A tall tale. Still is as investors waste their time trying to figure out the near impossible.

Dafjev - 5 years ago    Report SPAM

There is a huge diffrence between what Eddie Lampert did with Sears and Warren Buffett with Berkshire Hathway! After Buffett realised that Berkshire was a thinking ship he extracted every dollar he could and reinvested it in OTHER businesses that generated more cah flow which he reinvested further and turned it into the berkshire of today even though the original textile mill no longer exists. What Eddie Lampert did is extract every dollar he could and REINVESTED IT INTO SEARS STOCK though share repurchases. If the original sears and kmart go the same way as the original barkshire hathway there will be nothing left of all the cash generated because it will have sunk with the ship! This is totally different then what buffett did berkshire
PHILCIR - 5 years ago    Report SPAM
Lets not forget about all the inside dope buffett received from his dad, the nebraska congressman and his friends in government. Buffett's quid pro quo relationship w/ gov't is currently evidenced by his $2b investment into solar. A highly predictable cash flow generator and so simple to figure out the cash flows going forward. I'd say such an investment has virtual bond like coupons -- wouldn't you?

Buffett actually tried retail w/ a baltimore retailer (i think it was called diversified or something like that) and that's where he realized first hand the difficulty of the business. Much easier to partner up w/ pals in congress. Eddie should have been a bit more outgoing and attended more social events in washington to be like his hero, warren.. It seems eddie may have believed his own press.

Jonmonsea premium member - 5 years ago
Not to beat a dead horse, but (and I own SHLD) isn't 90% of Sears Canada and Sears inventory (marked down 90%) and Kmart real estate (marked down 50%) not worth more than $3 billion, brands aside? If someone could address the real estate valuation, that would be great. Sears Canada exists and is very liquid and has fallen a lot this year, as well. Basically, a sum of the parts argument, but can someone say why these assets do not add up to at least 30% more than current share price, even when drastically discounted?
PHILCIR - 5 years ago    Report SPAM
Sum of the parts? when is the last time that worked. Sum of the parts rarely ever pans out. As for the RE valuation that's a huge speculation. think about it? someone on this board is going to evaluate all of that commercial real estate by looking at an annual report or 10K. Do these people have extension experience in the commercial real estate industry? Know the markets where the properties are located. Real retail property experience (not reading ARs or value line or how buffett does it). Off balance sheet debts, mortgages, etc.... How long would it take to properly appraise their portfolio?

My point is an investor, like Nygren or Davis, believing that he is evaluating these mega corporations by some future cf metric is mostly illusory. A plesebo. For the most part, those guys are totally delusional. They are really skimmers who portray themselves as investors. Skimming is a better way of attaining wealth than is investing. It's steady with limited risk.

Value investing works best when you have superior knowledge, inside knowledge, or during times of great distress when the market gets destroyed and your only question is --- does this company trading for $5 survive.

Sears sum of the parts via liquidation: 8 - 12 bucks p/share tops.
Jonmonsea premium member - 5 years ago
Thanks for your response, PHILCIR. How do we get to 8-12 per share?

From my analysis, I argue $10 per share from Sears Canada and Mexico. Then $7 per share for inventory. Then $30 per share real estate. Totals $47 per share before brands. So, $50/share. ($3 for brands and the retailing operations that everyone knows are all but worthless). Would you go through your analysis and mine and tell me specifically where you feel I am off? (Thanks!)

I agree that value investing works best with inside knowledge and times of great distress (altho isn't that the case for SHLD now given its short ratio), but that does not preclude investments made w/o insider knowledge from being good investments, does it? As for the lack of real estate experience, surely real estate people could be hired for a slow liquidation whose proceeds are plowed back into share repurchases. That may be "skimming" if I understand you correctly, but I argue that given the real value behind the stock blips, that "skimming" could well result in profit for the shareholder, especially at these levels.

Ilovesummer - 5 years ago    Report SPAM
Both the common shareholder and the common bondholders are getting screwed.

The are paying or hoping for something that has been sold out from under them

and is difficult to find. This type of information should be transparent to any investor

not hidden away.

I couldn't figure out why EL was interested in the common stock of this company

itself . Now it makes sense with this .
AlbertaSunwapta - 5 years ago    Report SPAM
Based on my recent experience I think Sears Canada is in for some major problems!

Sears slashes prices to compete with Target



"Along with price-cutting, McDonald said Sears will modify its traditional format of offering a wide variety of products.

He said the chain will focus on it strengths - big-ticket items such as appliances and outdoor equipment as well as women's and children's clothing while trimming back in other categories." - Toronto Sun, Feb 17, 2012

Focusing on appliances!!! If that is the case they are in trouble here. We were looking at a new over-the-counter LG microwave oven at Sears (Sears Canada) It was $850 CDN - on sale for $750 which was no sale - it just matching Home Depot's regular price! Moreover the same microwave in the USA is almost $300 cheaper!!! AND, the Canadian dollar is near par with the USD. Five percent sales taxes and any non-north-american-made tariff's might add 10% or 15% or so. Moreover, in our city alone 5 new Walmarts are scheduled to open in the next couple years. (On top of the fair number of Walmarts already here!)

AlbertaSunwapta - 5 years ago    Report SPAM
On this news not much has changed about the business itself, mostly just the accounting for it (and the prospect of a cash infusion) but people seem to be rapidly shifting from the depressed emotional state to the manic emotional state.

UPDATE 3-Sears quells fears about liquidity; shares soar

AlbertaSunwapta - 3 years ago    Report SPAM
Any further or current opinions on Sear Holdings these days?  
Batbeer2 premium member - 3 years ago


If I find the time I may submit SHLD for the contest.

If the market value of the RE is just 50% higher than cost, investors can collect about $90 of cash per share. That is not much to ask for property that has been on the books for decades.

What's more, it seems they are finally preparing to spin off the RE so we will finally know.

Also, I wouldn'nt be surprised to see them buying back a load of shares. Lampert can regain control that way. I need to do some work. I'll let y'all know if I find something worth writing about.

Please leave your comment:

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