{"id":26254,"date":"2011-12-28T13:00:26","date_gmt":"2011-12-28T18:00:26","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/12\/28\/is-sears-the-next-berkshire-hathaway\/"},"modified":"2011-12-28T13:00:26","modified_gmt":"2011-12-28T18:00:26","slug":"is-sears-the-next-berkshire-hathaway","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/12\/28\/is-sears-the-next-berkshire-hathaway\/","title":{"rendered":"Is Sears the Next Berkshire Hathaway?"},"content":{"rendered":"

By The Sizemore Letter<\/a><\/p>\n

\"\"<\/a><\/p>\n

Sears Holdings Chairman Eddie Lampert<\/p>\n<\/div>\n

A well-respected value investor buys an old American company in decline, promising to restore its fortunes.\u00a0 Alas, the recovery never comes.\u00a0 The economics of the industry have changed, and the company cannot compete with younger, nimbler rivals.\u00a0 The company ceases operations, but the value investor holds onto the shell to use as an investment vehicle.<\/p>\n

Could this be the future of Sears Holdings (Nasdaq: $<\/span>SHLD<\/a>)<\/strong> under Eddie Lampert?\u00a0 Maybe; maybe not.\u00a0 But it was certainly the case for Warren Buffett\u2019s Berkshire Hathaway (NYSE: $<\/span>BRK-A<\/a>)<\/strong>.<\/p>\n

Unless you\u2019re a history buff or a dedicated Buffett disciple, you might not have known that Berkshire Hathaway was not always an insurance and investment conglomerate.\u00a0 It was a textile mill, and not a particularly profitable one.\u00a0 It was, however, a cash cow.\u00a0 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.<\/p>\n

So, when hedge fund superstar Eddie Lampert first brought Kmart out of bankruptcy in 2003, the parallels were obvious.\u00a0 With its debts discharged, the retailer would throw off plenty of cash to fund Lampert\u2019s future investments.\u00a0 And even if the retail business continued to struggle, Lampert could\u2014and did\u2014sell off some of the company\u2019s prime real estate to retailers in a better position to use it.\u00a0 Lampert sold 18 stores to the Home Depot (NYSE: $<\/span>HD<\/a>)<\/strong> for a combined $271 million in the first year.<\/p>\n

That Lampert would use Kmart\u2019s pristine balance sheet to purchase Sears, Roebuck, & Co.\u2014itself a struggling retailer\u2014seemed somewhat odd, but his management decisions after the merger seemed to confirm that his strategy was cash cow milking.\u00a0\u00a0 Lampert continued to talk up the combined retailer\u2019s prospects, of course.\u00a0 But his emphasis was on relentless cost cutting, and he invested only the absolute bare minimum to keep the doors open.\u00a0 Sears Holdings didn\u2019t have to compete with the likes of Home Depot or Wal-Mart (NYSE: $<\/span>WMT<\/a>)<\/strong>. It just had to stay in business long enough for Lampert to wring out every dollar he could before selling off the company\u2019s assets.<\/p>\n

The strategy might have played out just fine were it not for the bursting of the housing bubble\u2014which killed demand for the company\u2019s Kenmore appliances and Craftsman tools\u2014and the onset of the worst recession in decades.\u00a0 With retail sales in the toilet (and looking to stay there for a while), there was little demand among competing retailers for the company\u2019s real estate assets.<\/p>\n

It\u2019s 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.\u00a0 But investors \u00a0frustrated by watching the share price fall by more than 80 percent from its 2007 highs have no one to blame but themselves.\u00a0\u00a0 Anyone who bought Sears when it traded for nearly $200 per share clearly didn\u2019t do their homework.\u00a0 They instead were hoping to ride Lampert\u2019s coattails while somehow ignoring the value investor\u2019s core principle of maintaining safety by not overpaying for assets.<\/p>\n

Lampert is a great investor with a great long-term track record, and there is nothing wrong with paying a modest \u201cLampert premium\u201d for shares of Sears Holdings.\u00a0 If you like Lampert\u2019s investment style but lack the means to invest in his hedge fund, Sears may be the closest you can get.\u00a0 But at $200 per share\u2014or even $100\u2014the Lampert premium had been blown completely out of proportion.\u00a0 The same is true of Buffett, of course, or of any great investor.\u00a0 As the Sage of Omaha would no doubt agree, there is a price at which Berkshire Hathaway is no longer attractive either.<\/p>\n

This brings us back to the title of this piece\u2014is Sears the Next Berkshire Hathaway?<\/p>\n

I would answer \u201cyes,\u201d but not necessarily for the reasons you think.<\/p>\n

Everyone assumes that Buffett\u2019s decision to buy Berkshire Hathaway was a typical Buffett stroke of genius.\u00a0 Nothing could be further from the truth.\u00a0 In fact, Buffett revealed in an interview last year that Berkshire Hathaway was the worst trade of his career.<\/em><\/strong><\/p>\n


\n<\/object>
\nIf you cannot view the video above, please follow this link: “Buffett’s Worst Trade<\/a>“<\/center> <\/p>\n

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.\u00a0 He had been trading Berkshire Hathaway\u2019s 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.<\/p>\n

\"\"<\/a><\/p>\n

We've all been there, Warren.<\/p>\n<\/div>\n

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.\u00a0 And though it might have given him satisfaction at the time, Buffett called the move a \u201c200-billion-dollar mistake.\u201d<\/strong><\/p>\n

Why?\u00a0 Because Buffett wasted precious time and capital on a textile mill in terminal decline rather than allocate his funds in something more profitable\u2014in his case, insurance.\u00a0 Berkshire Hathaway will still go down in history as one of the greatest investment success stories in history.\u00a0 But by Buffett\u2019s own admission, he would have had far greater returns over his career had he never touched it.<\/p>\n

So, in a word, \u201cyes.\u201d\u00a0 Sears probably is the next Berkshire Hathaway.\u00a0 And investors who buy Sears at a reasonable price will most likely enjoy enviable long-term returns as Lampert\u2019s plans are eventually realized.\u00a0\u00a0 But Mr. Lampert himself will almost certainly come to regret buying the company\u2014if he doesn\u2019t already.<\/p>\n

If you liked this article by Sizemore Insights<\/em>, you\u2019d probably enjoy The Sizemore Investment Letter<\/em>, our premium members-only newsletter. Click here<\/a><\/strong> for more information.<\/p>\n","protected":false},"excerpt":{"rendered":"

By The Sizemore Letter Sears Holdings Chairman Eddie Lampert A well-respected value investor buys an old American company in decline, promising to restore its fortunes.\u00a0 Alas, the recovery never comes.\u00a0 The economics of the industry have changed, and the company cannot compete with younger, nimbler rivals.\u00a0 The company ceases operations, but the value investor holds … <\/p>\n

Continue reading “Is Sears the Next Berkshire Hathaway?”<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-26254","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/26254","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=26254"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/26254\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=26254"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=26254"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=26254"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}