The Sears Holdings Corp (SHLD) Stock Rally Is Pure Fantasy

A massive resurgence in Sears stock has bears questioning their forecast.

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.

The Sears Holdings Corp (SHLD) Stock Rally Is Pure Fantasy

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.

Nowhere to Hide for SHLD stock

Sears stock, SHLD stock
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Source: Source: JYE Financial, unless otherwise indicated

Charts, though, only go so far. I’d hate to rely on a technical burst as the sole reason why I’m vested in a company. If the financials aren’t so hot, I would at least want barometers that suggest a rise in the underlying industry. With Sears, both factors are negative.

As just mentioned, Sears’ financials are horrid. But the brick-and-mortar retail sector isn’t much better. Of the many problems impacting the sector, real estate investment trusts represent a critical roadblock. We often overlook the fact that retailers are just like us — they have to pay rent. Without foot traffic, however, Sears can’t justify its massive footprint. Unless mall REITs are willing to take some cuts — they’re not — good options don’t exist.

This will set off a perpetual cycle of bearishness. Sears will have to close more unproductive stores. This will impact the REITs, as well as smaller businesses which benefitted from residual traffic. Fewer goods sold leads to higher prices. Consumers fail to play along and instead shop at, Inc. (NASDAQ:AMZN).

Again, none of this is a net positive for Sears. So the only thing I can say about its recent revival is that it’s pure speculation. At any time, for any reason, or even no reason, that rally can be stopped dead in its tracks.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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