There are ugly stocks and then there is Sears Holdings Corp (NASDAQ:SHLD). If you somehow missed the litany of doomsday reporting on Sears, this once mighty brand is in trouble. We’re not just talking about ticking off major investors and financiers. Sears may no longer be a thing, raising doubts about the domestic economy’s true health. You wouldn’t know that, however, judging from the 150% gain off its February low.
Looking over the trailing ten years, SHLD stock witnessed a thermonuclear implosion of its equity value.
Since April 2007, Sears stock has dropped more than 92%. Any contrarian argument must incorporate this statistic to appreciate the overall context. In addition, as InvestorPlace contributor Chris Tyler points out, brick-and-mortar retailers are on “life support.”
It’s not just discount malls like J C Penney Company Inc (NYSE:JCP) — which is down 31% year-to-date — for which investors must account. Luxury retailers that cater to a more affluent clientele, such as Nordstrom, Inc. (NYSE:JWN) and Dillard’s, Inc. (NYSE:DDS), are lagging. The former is down 2% YTD, while the latter is off by a disconcerting 15%.
So it’s surprising when you discover that Sears stock is one of the best performing retail stocks this year. It handily beats out the major shopping malls, and it’s currently the king of publicly-traded big-box retailers. So has Sears finally found its lifeline?
The Sears Rally in Context
If SHLD stock is a legitimate undervalued opportunity, then I’m a Nigerian prince. Furthermore, I’ve got a billion-dollar check that I’m willing to split down the middle.
All joking aside, I understand why people are tuning into Sears stock. The upside momentum is no laughing matter. For the year, SHLD shares gained over 50% in the markets. Even more remarkable, this resurgence occurred in just the past few weeks. Up until March 27, Sears stock was in the red against its January opener. I suppose you can call it a premature April Fool’s prank.
But as great as those numbers are, you have to question its sustainability. In other words, is the Sears stock move a one-off event or a fundamental tailwind. Mr. Tyler notes that two major players — Sears CEO Eddie Lampert and Fairholme Capital Management — have ramped up their respective positions. Have they lost their minds?
Turns out, not really. Tyler writes that the “‘aggressive’ buying in SHLD stock likely has much to do with larger and costlier stakes as company creditors, preventing a collapse in share price from negatively impacting the pair’s broader interests tied to Sears.” To them, it’s a small sacrifice to help prevent a cataclysmic disaster.
But Sears is nevertheless headed directly toward that disastrous scenario. A snapshot of its financials shows very little salvageable value in SHLD stock. Its balance sheet is junk. Its profitability throughout the income statement is nonexistent. To top it off, its bleeding cash. Sears is the kind of company that turnaround specialists avoid, so as to not soil their reputation.