Is It Time to Short Sears Again?

by Jeff Reeves | May 1, 2012 11:55 am

Sears Holdings (NASDAQ:SHLD[1]) was cruising at a high of $120 in May 2010. Then, the wheels fell off and the stock started a steady descent to under $30 at the beginning of this year. The company is bleeding cash, closing stores[2] and riding a simply stunning track record of 20 straight quarters of sales declines.

But the funny thing: SHLD stock is up a whopping 90% since Jan. 1. So what gives?

In a nutshell, a “short squeeze.”[3] In other words, short sellers who were betting on the downside of the stock have rushed to cover their positions — creating the illusion of a rush to buy, when it is really just a rush to no longer short.

Take Tuesday’s roughly 12% surge in SHLD stock, for example, after the company offered an optimistic sneak peek at earnings. The retailer said Tuesday it expects first-quarter earnings of between $155 million and $195 million, or $1.46 to $1.84 per share. Returning to an operating profit was good for Sears and spooked the short-sellers again. It brought in some optimistic investors, too, but the power of the short squeeze again was fueling a dramatic pop in SHLD.

The million-dollar question, of course, is whether Sears will keep going up or whether it is time to short Sears again.

First, we have to acknowledge that it’s unlikely Sears is going to have some truly impressive revitalization plan. CEO Eddie Lampert officially is in panic mode, closing some 100 stores and looking to raise $140 million to $170 million as inventory is shuffled out at fire-sale prices.

I mean, come on. If J.C. Penney (NYSE:JCP[4]) has lost 6% in the past 12 months despite plans to recast the store in the vein of Apple (NASDAQ:AAPL[5]), what hope does Sears have? Former Apple retail guru Ron Johnson has an ambitious plan[6], but shares have lagged the market since he took over late last year in part because brick-and-mortar retail is struggling and consumer spending remains weak. No amount of Apple magic can change that.

And if you’re Sears — where your strategy has been to flail around with online movie downloads[7] and the like — it’s not looking good no matter what share prices have done.

On the other hand, Lampert has put rumors of bankruptcy to rest and Sears occasionally is the subject of buyout rumors[8]. So this company isn’t going away anytime soon. And as recent earnings show, the streamlining of the business could allow SHLD to get its feet back under itself.

It’s a tough call. But to me, the cons seem too much to get past.

InvestorPlace contributor Beth Moon recently wrote a great analysis of Sears[9] that laid out the reason for the run and the risks to holding this stock any longer. She seemed spot-on and almost exactly called the peak of this 2012 run with her advice. And despite the recent pop in SHLD, the retailer remains down 10% from Beth’s call.

It’s a very risky call, but short sellers could use the surge in Sears shares to get in at another peak and wait for the bottom to fall out.

Of course, one more short squeeze could be all it takes to ruin your trade and deliver heavy losses. As of April 13, more than 50% of shares still were held short — and though some traders headed for the exit today, you can bet plenty more are sticking around and could cause a repeat performance.

But hey, if you don’t like risk, you shouldn’t be short selling to begin with.

Jeff Reeves is the editor of, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[10] Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.

  1. SHLD:
  2. closing stores:
  3. “short squeeze.”:
  4. JCP:
  5. AAPL:
  6. Former Apple retail guru Ron Johnson has an ambitious plan:
  7. online movie downloads:
  8. buyout rumors:
  9. recently wrote a great analysis of Sears:
  10. “The Frugal Investor’s Guide to Finding Great Stocks.”:

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