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World's Scariest Stock: Sears Holdings

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It's not just things that go bump in the night that you need to be afraid of, but also the monsters lurking in your portfolio that can give you the shakes. Just ask investors in Sears Holdings (Nasdaq: SHLD  ) , because they know what a scary stock the retailer has been. Even at these depressed prices, it holds monstrous potential to haunt you for years to come.

George Romero's zombie hit Dawn of the Dead showed the slack-jawed undead attracted to a mall, perhaps in some primal remembrance of how their lives used to be. That's how the once-venerable retailer must be feeling these days. At a time when Wal-Mart Stores (NYSE: WMT  ) has been surprising analysts with same-store sales that meet or exceed expectations, Sears Holdings hasn't posted a single quarter with rising comps in the three years since emerging from bankruptcy.

For a discount retailer, that has to be especially painful -- but then again, zombies don't feel pain.

Lampert the Reanimator
Yet painful it has been. Like a modern-day Dr. Frankenstein, Sears Holdings Chairman Eddie Lampert has been trying to cobble together a living being, one rotten corpse at a time, much as Warren Buffett did with ailing textile mill Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) . First, Sears merged with a failed Kmart and then tried to pick up fading home-decor specialist Restoration Hardware.

It's been a long time since the Oracle wannabe displayed any of his "Lampert magic," though. His use of total return swaps has seemingly failed more times than it has worked in Sears Holdings' favor, and the idea that the retailer may have been some kind of asset play with valuable real estate in prime locations has faltered as the commercial market collapsed and credit remains in a deep freeze.

Bring out your dead!
Too often, it seems Lampert has resorted to using share buybacks to prop up earnings, both at Sears Holdings and at his other fiefdom, AutoZone. In both cases, hard-earned capital was squandered on buying up overpriced shares instead of investing in the stores. Over the past year, Sears Holdings has spent more than $1.35 billion buying back some 11.5 million shares, for an average cost of $117 each. Today, the stock trades around $50 a share. The vaunted cash balances that once exceeded $4.4 billion now register at just over $1.5 billion.

Malls have become ghost towns as consumers strive to stretch their dollars as far as they can. When you can save even more money by shopping at Wal-Mart or Costco (Nasdaq: COST  ) , why go to Sears? As fellow Fool Richard Gibbons points out, things are going to get worse as even retailers such as Target (NYSE: TGT  ) -- a brand slightly more happening than Sears -- suffer from declining comps.

At 27 times next year's earnings, Sears Holdings trades at three times the valuation of midmarket retailers such as Kohl's (NYSE: KSS  ) and J.C. Penney, yet it may still induce the kind of chills investors don't need in these markets.

A place for ghost stories
Do you agree with me that buying Sears Holdings stock is a scary thought and that the aging retailer is the World's Scariest Stock? If so, join with me over at the investor-intelligence community Motley Fool CAPS and select Sears Holdings to underperform the market. You can lay out your creepy tale and let us know you find there are more tricks than treats in this stock. Then come back in a week to find out who has won the dubious distinction of being the World's Scariest Stock.

Wal-Mart, Sears, and Berkshire Hathaway are Motley Fool Inside Value recommendations. Costco and Berkshire Hathaway are Stock Advisor picks. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Rich Duprey owns shares of Wal-Mart but has no financial position in any of the other stocks mentioned in this article. You can see his holdings. The Motley Fool has a disclosure policy.

Read/Post Comments (2) | Recommend This Article (11)

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  • Report this Comment On October 31, 2008, at 1:38 PM, Nothingiscertain wrote:

    The only thing scary is your lack of hard hitting facts to suport an argument based on generalizations and glitter generalities. As of this writing, over the past 1 year period Sears Holdnigs stock has declined 55.73% versus Macy's stock which is down 61.60% and JCPenny which is down 57.73%.

    No one could have predicted a meltdown of this magnitude. I am not worried over the long-term as because Eddie Lampert is a value investor, who will turn ailing retailers into a financial engine that could power what could become the world's most successful holding company.

    Sears Holdings is the largest appliance seller in the U.S. The company also has great brands.

    The question becomes how can you sustain the sales and growth of these great businesses while leveraging the company's valuable assets.

    In the meanwhile he built his position in Sears Holdings using the company's money to buy back stock and pay off debt. He has 51% of Sears Holdings. Every long-term share holder has benefited as their ownership in the company has increased along side Lampert's stock. Eddie Lampert is not interested in growth at a competitive disadvantage which destroys value.

    It's taken him 5 years to allocate capital to increase his owenrship to 51%. Comparably, it took Warren Buffet 7 years to obtain a 49% stake in Berkshire Hatahaway and change the management.

    In 1985, 23 years after Buffet initially started buying a position in Berkshire Hatahway the last textile operations (Hathaway's historic core) were shut down. As I stated before this a long-term investment. Unlike Berkshire Hatahway, Sears Holdings is MAKING MONEY.

  • Report this Comment On November 16, 2008, at 3:20 PM, exlandsender wrote:

    No one ever mentions Lands' End when talking about Sears Holdings. They just got drug into this mess. Eddie must have written the comment above too or one of the many overpaid execs. Sears Holdings has cut expenses, not increased sales. They cut expenses by first cutting the disabled, next "coaxing" the near retirement age workers to retire. (and the "coaxing" means are not pleasant) and then by "letting go", firing, cutting positions or any way they can think of ridding their budgets of loyal hardworking long term employees. Maybe that is no big deal in a big city like Chicago. But in southwestern rural Wisconsin it is a VERY BIG DEAL. Jobs are scarce and Lands' End has been the main employer for many years. The company was founded on "take care of your customer, take care of your employee and the rest will take care of itself" Eddie has no idea what this concept even means. Too bad employees can't get together and file a lawsuit as I think that they would have a case for Age Discrimination. Few who have lost their jobs at Lands' End (out of hundreds, probably a thousand or more now) had less than 20 years in the company. Those people were then forced to either work low wage part time jobs wherever they can find them or drive an hour each way to Madison, WI. Why is this ok with you, Eddie? You have not a caring bone in your body. Check out the comments under Sears, Sears Holdings or Lands' End at and see what employees think of this company. Sears promotes Extreme Home Makeover and tries hard to get customers to believe that they care about those in need. At the same time they are firing employees left and right at their companies and torturing the rest of their benefited employees on a daily basis to try to get them to leave, they are trying to get the rest of us to believe there is a "softer side to Sears" Ha. What a joke. There is probably few customers in the United States who have not had a bad experience at Sears. On our local news out of Madison, Wis most of the consumer complaints have to do with Sears appliances and products and the poor customer service encountered by them. So bad that local news channels have to step in and assist the customers. Greedy Corporations are what have caused the downfall of our country and Mr. Eddie Lampert is one of the greediest. Before America can turn around, the corporate attitudes in this country need to change. Stop giving yourselves millions in salaries and bonuses while at the same time denying employees a living wage and some decent benefits. Or even worse shipping jobs overseas. Stand up for your fellow citizens, pay them a fair wage for a fair days work, offer a pat on the back too and a share in the profits for being a loyal employee. Reward those loyal long term workers by letting them keep their jobs and not finding excuses to fire them by the time they are 50. Treat them like you would want to be treated.

    Now Lands' End is having trouble recruiting employees...imagine that...We are a close knit community and those of us with children graduating from college will no longer come back to the community to work for Lands' End. They have seen how their parents, aunts and uncles, cousins and friends have been treated. And no one will actually move to Dodgeville, Wi anymore to work for a company where there is absolutely no job security. Even the entry level positions can no longer be filled. They are cutting their own throats. It used to be easy for them to get seasonal help. Not easy anymore. As a friend told me who worked last Christmas peak at Lands' End "its like working for the Gestapo. I don't care how much they pay, its not worth being treated like that." My sister-in-law who worked for Sears in Madison, Wi last year said the same thing. As a long term benefited employee who lost their job there after 25 years, it just makes me sad. It doesn't have to be this way. I worry for my co-workers and for "my company". And I worry about how devastating it will be for the community if Lands' End closes.

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