Sears Holding Corp (NASDAQ:SHLD) sure is a controversial stock. Many people have said that Sears has been a dead company for many years now, and yet Sears stock continues to be alive and kicking.
Yes, the trajectory is ever-lower, with SHLD stock down from the $20s as recently as mid-2015 to the single digits now. But short sellers riding Sears stock to zero keep getting surprised.
Most recently, the stock exploded from $6 in February to $14 in April.
Sears stock has slumped again in May, as retail earnings reports have triggered a bloodbath in the sector. But with short interest still high, is another big trade setting up for Sears stock?
SHLD Stock Cons
High Bankruptcy Risk: S&P Global’s Market Intelligence unit put out a report in April highlighting the retail stores that face the highest risk of bankruptcy over the next year. S&P’s model determined that there is a 23.8% chance of Sears going bankrupt over the next year — top of the list. According to that report, the next likeliest firm to declare bankruptcy over the next year is DGSE Companies, Inc. (NYSEMKT:DGSE). However, DGSE only runs a 14.9% chance of failing over the next year. SHLD stock is uniquely risky.
Adding insult to injury, Sears spin-off Sears Hometown and Outlet Stores Inc (NASDAQ:SHOS) is also listed among the ten firms most likely to fail this year. Given the overwhelming bankruptcy risk, SHLD stock seems like an aggressive bet here, well off its 52-week low. If you want to go dumpster-diving, at least wait until vultures are circling.
Bankruptcy Coming in July?: Bears have long argued that Sears’ insiders are dividing up the company to seize assets rather than letting them go to rightful creditors. A big part of this came with the sale and leaseback of the real estate for many of Sears’ stores.
Two years ago, on July 8, 2015, Sears made a $2.7 billion deal with Seritage Growth Properties (NYSE:SRG) to sell them a great deal of Sears real estate. Creditors have argued that this deal represented unfair insider self-dealing to take the real assets out of Sears and leave creditors with an empty vessel. Bankruptcy law protects creditors to a degree — there is a two-year lookback period for so-called fraudulent conveyance. In English, that means that if a company going bankruptcy sells off assets, creditors can go back and reclaim them. This lookback period will end in July of this year; many have suggested that Sears is merely keeping the lights on until July 10, when it can file bankruptcy without being subject to its SRG deal blowing up. Insiders, of course, own lots of SRG stock and would be hurt if lawyer’s unwound the deal with Seritage.
Sales Collapsing: Combining Sears and Kmart sales, the company has witnessed catastrophic volume declines in recent years. In 2015, same-store sales plunged 14%. In 2016, things barely improved; sales dove another 12%.
The company is struggling to even keep the shelves stocked as more and more suppliers don’t want to take a risk on Sears anymore. The company has no buzz, and shoppers have moved on. A turnaround stock needs some catalyst. Sears can’t survive in the long run, as sales keep plunging double-digits every year.
SHLD Stock Pros
Huge Insider Ownership: Bruce Berkowitz and Eddie Lampert combined own around 85% of Sears’ stock. It’s not often that you’ll see two billionaires own almost the entirety of a publicly traded company.
While Lampert in particular has not led Sears effectively from a retail perspective, he is a financial wizard. And Berkowitz has delivered a great investing track record as well. Both superstar investors are way underwater on their Sears investment, and are highly motivated to try to turn the situation around. While Sears’ outlook seems bleak, at least shareholders have motivated management involved.
Aggressive Cost Controls: Sears is in deep trouble. But it isn’t quite lights out yet. The company plans to sell another billion dollars worth of real estate this year. It is closing 200 stores or more a year — that’s an aggressive pace.
Shrinking store count solves several problems. It stems operating losses, allows them to tie up less capital on inventory, and also allows them to better stock the remaining stores that can produce a profit. Empty store shelves are a huge negative with Sears now. To fix the slide in store sales, Sears has to put its best food forward at the viable stores still open.
Management’s current strategy may significantly slow the company’s rate of financial losses. All told, Sears is now aiming for $1.25 billion in annualized cost savings; likely not enough to save the firm. But it could increase the company’s longevity a bit.
Short Squeeze Potential: Short sellers are convinced SHLD stock is heading to zero, and they’ve expressed that with heavy bets against the company. As of latest data, more than 65% of Sears stock has been sold short, according to data from Gurufocus.
In raw data terms, around 15 million shares are currently being shorted. That’s down slightly from the peak of 19 million shares in early February. Still, given that SHLD stock only typically does 1.5 million shares of volume per trading day, shorts would have to buy up every share of Sears stock that trades for an entire two-week span to dispose of their positions.
Needless to say, that sort of buying could cause a spike. Given the exceptionally high level of short interest, SHLD stock owners can also potentially earn high lending fees when they permit their stock to be borrowed by short sellers.
Sears might survive awhile longer. However, bankruptcy seems to be the likely final outcome for SHLD stock. Traders can make a fortune on the short-term moves with skillful operations. However, Sears stock simply isn’t appropriate for most investors, since the risk here is extreme.
If you are bullish on Sears surviving a little longer, one alternative is CBL & Associates Properties, Inc. (NYSE:CBL). CBL is a mall REIT. Traders have battered its stock over the past year as more retail firms go bust. With CBL stock down from a peak of $13 last summer to just $8 now, it offers a sizzling 14% yield that, for now, is still covered by cash flow.
CBL has huge exposure to Sears as a tenant; if Sears survives for awhile, it will benefit as well. And unlike Sears, which pays no dividend, CBL gives you a rich reward for taking on the brick-and-mortar retail risk.
At the time of this writing, Ian Bezek owned CBL stock. He had no position in Sears. You can reach him on Twitter at @irbezek.