Why Sears Is Still the Most Dangerous Stock on Wall Street

Keith Fitz-Gerald Jan 13, 2017
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Sears Holding Corp. (NasdaqGS:SHLD) announced a $900 million deal to sell its iconic Craftsman brand to rival tool maker Stanley Black & Decker earlier this week, leading many investors to wonder if it’s time to pony up for a rebound or just hang on.

Neither.

Sears is still the most dangerous stock on Wall Street, and if you own it, you’re gonna get hosed… if you haven’t been already.

Don’t say I didn’t warn you.

Clicks and Mortar, Not Bricks and Mortar

On January 23, 2015 I called Sears one of the “five scariest stocks on Wall Street” and urged you to give it a wide berth or short it outright.

It’s dropped more than 73.64% since I recommended shorting it, and is trading at a stunning 5% of its stock price exactly 10 years ago.

I know Sears an iconic brand, but these days that’s not enough.

The company is hemorrhaging red ink.

…sales are in decline and have been for years. Things are so bad that Sears lost $1.6 billion during the first three quarters of last year, which is triple the loss a year earlier in 2015. Gross margins have fallen another 2.5% even as operating expenses continue to rise. Comparable sales are plummeting.

…the company has closed more than 2,500 stores over the past six years and recently announced plans to shutter another 150 Kmart and Sears stores. As of November 2016, Sears had 550 stores with leases expiring within the next few years, according to CFO Jason Hollar in a Fortune interview. Every one of them is on the chopping block.

…Sears is dogged by persistent bankruptcy rumors, based on – among other things – a staggering $4.46 billion debt load.

It’s only a matter of time before Sears goes the “way of the Dodo.”

The Dodo’s last recognized sighting was in 1662, when it had been hunted literally to extinction. Fat, clumsy, and unable to fly, the only known remains are a head and some tissue brought to Europe in the early 17th century and dissected at the Oxford University Museum in the 19th century.

The reason I’m bringing this up is that Sears is a lot like the proverbial Dodo.

The once iconic American retailer badly misjudged the shift to online shopping and away from traditional retailing that had been its domain almost exclusively since 1893, when it was founded by Richard Warren Sears and Alvah Curtis Roebuck in Chicago. Executives continued to believe that Sears was something special when, in fact, consumers gave up that notion years ago and viewed it as just another place to shop… and not a very good one at that.

CEO Eddie Lampert, a Wall Street financier once rumored to be the next Warren Buffet took the helm at Sears in January 2013. He’s rumored to have lent the company at least $1 billion in successive attempts to resurrect the brand and turn it into an “asset-light company.”

No doubt he’s made some smart moves as of late. He’s sold off key Sears components including Lands End, Sears Canada, and Sears Hometown and Outlet Stores. He’s also created a publicly traded real estate holding company called Seritage Growth Properties (NYSE:SRG).

Yet, Sears is still coming unglued.

To paraphrase Warren Buffett’s 2005 remarks to University of Kansas students, it’s “not enough” to have smart people running your stores. He should know; Berkshire Hathaway bought a Baltimore department store named in 1966 and couldn’t make it work before selling a few years later.

I couldn’t agree more strongly – retail, except under very specific circumstances, is a dying sector.

Have you been in a Sears lately?

I have. The parking lot was empty, the shelves in disarray, and the clerks (if you could find one) were clearly unimpressed by what’s happening. It was about as depressing a shopping experience as I’ve ever had.

A lot of people will tell you this is because of Lampert himself. That he’s run the company like a personal piggy bank for years and has been systematically stripping it of wealth in an attempt to create “shareholder value.”

In reality, Amazon.com Inc. (NasdaqGS:AMZN)’s almost singlehandedly killed Sears…. and Macy’s… and Kohls… and a dozen other once-proud retailers who simply could not make the jump from bricks and mortar to clicks and mortar. Lampert, for all his financial acumen, simply can’t keep up. But that’s a story for another time.

What matters now is that Sears is done, and even at $9.00 a share it’s not a bargain, let alone “on sale.”

So… what do you do if own Sears, or think it’s a great turnaround play?

I think Lampert has his eye on a protracted liquidation. The moves he’s making remind me of fictional financier Gordon Gekko from Oliver Stone’s 1987 smash hit film, Wall Street. Gekko’s character, in case you never saw the movie, created the tag line “greed is good” even as he raided – then stripped – companies in the name of millions.

I suspect Lampert will want to unload as many shares as he can to unsuspecting investors under the guise of a turnaround based on undiscovered “shareholder value,” which is how he’s going to pitch his moves. Most of this will come from complicated sales like the Stanley Black & Decker transaction and those of his hedge fund ESL Investments that pad his pockets, but do very little for yours.

You’ll rarely hear me say that it’s time to “take the money and run,” but this is one of those times.

If you’ve shorted Sears like I advocated in January 2015, you’re sitting on profits of at least 75%, so cover your bets and laugh all the way to the bank. There’s only another $9 to the downside and the benefits of capturing the final few bucks as Sears implodes are overshadowed by the risks of a false rally that goes against you.

If you’ve held on all the way down, that’s another story.

At the risk of sounding like my grandmother, let this be a lesson in why you should always use trailing stops. Even an ultra-wide 25% would have carried you out of the trade at $27/share more than a year and a half ago in June 2015. Now, though, you’ve got losses that will require a 277% rally just to break even!

Take whatever your proceeds are from selling Sears and buy Amazon stock. Not only will you gain exposure to every retail buyer in America as opposed to a few hundred people in a mall (on a good day), but you’re going to get the latest growth in big data, artificial intelligence, and cloud computing, too.

And that’s what I call a bargain.

Until next time,

Keith

5 Responses to Why Sears Is Still the Most Dangerous Stock on Wall Street

  1. Katy Vaux says:

    Dear Keith,
    Your advice on Sears is perfect, especially the warnings on extending the short or falling for a rebound. The 25% stop loss (or whatever figure one chooses) is brilliant, not so much because it’s fail safe (it isn’t–how many times do you sell only to see the stock rise again,) but because it eliminates the #1 and #2 individual investor mistakes–based on emotion and psychology–which are holding a falling stock all the way down and panicking and selling a stock at the bottom. I love your solution for someone who’s done this with Sears. Buy AMZN, exchanging junk for quality and buying a stock very likely to go higher for the money you have left in a real dog.

    Jim Cramer, who I would never recommend, and who touted Sears with a “BUY, BUY, BUY!!!” several years ago (along with now bankrupt Peabody at $60 per share) once gave the astute advice to get losers out of your portfolio, because “Everytime you see that loser in your portfolio, it hurts your confidence and your energy.”

    Thank you so much for sharing your amazing knowledge and grasp of investing. I’ve reformed my bedtime, but used to love watching your appearances on CNBC Asia from my treadmill.

    • tom fritzlen says:

      Have you looked at general growth Properties to short. Their malls have 41% of top anchors in S, Kmart and Macy’s. No growth over last5 years and big debt coming due in next three years.

      Tom

    • Jessica Sheppard says:

      Hi Katy, and thanks for reaching out! Keith’s on the road today, but I passed along your comment and he asked me to relay a message… check it out below!

      Jessica Sheppard
      Associate Editor

      Good morning Katy and thank you very much for the kind words!

      Sears – like many other retailers – is going to pinch a lot of investors who are caught “short” literally and figuratively. Quality, as you so rightly point out, matters!

      Thanks for watching and, of course, keep exercising; I’m heading out for a run in a bit myself.

      All the best regards and thanks for being part of the Total Wealth Family, Keith 🙂

  2. Roy Nair says:

    Test comment

  3. Tchiock says:

    If I were CEO of Sears, Walmart would be crying Uncle! The current CEO is doing an Obama on the company and should be run out of town fast!

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