Didn’t Fairholme Capital get the memo? Holding 22.8% of SHLD stock, still a struggling department store for all of Edward Lampert’s involvement, hardly seems like a sensible investment.
Yet SHLD accounts for slightly more than 10% of Fairholme Capital’s $9.7 billion in holdings reported at the end of December. Only AIG (AIG) and Bank of America (BAC) have greater weightings. All three have been accumulated over several years: AIG and BAC since 2010 and SHLD since 2007. In all three situations, you’re talking about deeply ingrained investment hypotheses that Fairholme isn’t planning to abandon anytime soon.
I can see the attraction of both AIG and BAC — but SHLD? Lampert took two struggling retailers and put them together in 2004 with lackluster results. He’s made more management moves than Daniel Snyder. And after putting in a year as CEO, Lampert still doesn’t seem to be the answer. Berkowitz is a bright enough guy. He has to see that Lampert was and always will be over his head when it comes to retail.
What does Berkowitz see in SHLD stock that the rest of us don’t? Let’s see if we can find out.
SHLD Real Estate
Fairholme’s August 2012 case study of SHLD is easily understood. He believes the embedded value of Sears’ 250 million square feet of retail space in mall-based and freestanding locations across North America is significantly greater than its current enterprise value.
SHLD has more leasable retail square footage than either Simon Property Group (SPG), General Growth Properties (GGP) and Kimco Realty (KIM), three of the country’s largest shopping center owners. The trio’s average enterprise value is $40.2 billion, almost five times the value of SHLD stock. Fairholme has placed a major bet that the true enterprise value of SHLD is closer to that $40 billion than the current $8.5 billion.
And he’s not the only one.
In September 2013, Baker Street Capital Management, which owns 8.5% of SHLD, presented a case study of its own, suggesting “Sears is an extremely asymmetric, timely and high margin of safety investment.”
Baker Street believes Sears’ break-up valuation is between $85 and $158 per share, providing investors with a whole lot of upside and not much downside. Furthermore, it believes that SHLD could deliver assets (Lands’ End, Sears Canada, Sears Home Services) worth almost $44 per share to shareholders in short order without affecting its core business or its real estate.