Sears Holdings-Berkshire Hathaway Comparison: Not a Compliment

by Charles Sizemore | March 5, 2012 1:34 pm

SearsLate last year, I asked openly[1] if Sears (NASDAQ:SHLD[2]) could be the next Berkshire Hathaway (NYSE:BRK.A[3], BRK.B[4]). While SHLD stock proceeded to surge more than 130% after that, the article admittedly was a bit of a tease.

When I suggested that Sears might be the next Berkshire, I didn’t intend it as a compliment. As I wrote in December, everyone assumes that Warren Buffett’s decision to buy Berkshire Hathaway was one of his typical strokes of genius. Nothing could be further from the truth. In fact, Buffett revealed in a video interview that Berkshire Hathaway was the worst trade of his career[5], as a “$200 billion mistake.”

Like Sears under chairman Eddie Lampert, Berkshire Hathaway was a company in terminal decline when Buffett bought it. Buffett spent the first few decades as owner slowly shuttering the company’s factories, selling off assets and redeploying the cash to more profitable ends.

Whether it was his intention or not, it appears Lampert is following the same path. Late last month, The New York Times reported that “In a Gamble for Cash, Sears Plans to Sell Stores.”[6]

Sears intends to raise nearly $800 million in cash by selling off some of its stores[7]. The move should placate investors who feared that the company was running out of cash, but it also makes it very clear that the company has no long-term future. Sales have been in decline for five consecutive years, and you certainly don’t reverse that trend by selling off stores. Like Berkshire Hathaway, there likely will come a day when Sears exists as a holding company and nothing more — and that day might be coming soon.

In any event, Lampert continues to increase his stake in the company. His hedge funds now own a full 61% of Sears stock.

Investors who shunned Berkshire Hathaway in the early days of Buffett’s leadership because they viewed it as a business in terminal decline missed out on one of the greatest investment success stories in history. Could it be that investors currently shunning Sears for the same reasons are making the same mistake?

Maybe. Lampert’s apparent strategy of selling off Sears for spare parts and redeploying the cash to more profitable ventures might yet prove to be worthwhile. And at just 0.18 times sales, Sears certainly trades at a discount to most major retailers.

Still, no matter what your opinion of Lampert as a “superinvestor,” it’s hard to justify buying a money-losing retailer in terminal decline that also is laden with debt. Sears’ debt-to-equity ratio is 80%. For a healthy business, this wouldn’t be a problem. But no one in their right mind would call Sears healthy.

Bottom line: If you like Lampert, follow his portfolio moves. There are plenty of sites that supply that information, including the popular GuruFocus (see Lampert’s portfolio[8]). But Sears is one that might best be avoided.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Sign up for a FREE copy of his new special report: “4 Dividend Stocks to Buy and Forget.”[9]

  1. I asked openly:
  2. SHLD:
  3. BRK.A:
  4. BRK.B:
  5. Berkshire Hathaway was the worst trade of his career:
  6. “In a Gamble for Cash, Sears Plans to Sell Stores.”:
  7. selling off some of its stores:
  8. Lampert’s portfolio:
  9. “4 Dividend Stocks to Buy and Forget.”:

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