The Worst Stocks for 2010: Sears Holdings

Many consumers seem to have forgotten that Sears and Kmart even exist. Once 2010 is done, Sears Holdings (Nasdaq: SHLD  ) shareholders may want to forget, too. A few promising signs do suggest that the retailer could still escape a Circuit-City-like fate -- but even so, its shares remain way too expensive. I predict 2010 will be a sad year for this stock.

Better isn't good enough
Sears investors recently got very excited when the company announced that December same-store sales squeaked up by 0.4%. In addition, impressive comps strength at Kmart actually offset weakness at its namesake Sears stores. The company was also able to increase its fourth-quarter earnings guidance to a much greater profit projection than analysts had been expecting.

These are admittedly heartening signs that Sears might not be quite as bad off as struggling retailers like Borders Group (NYSE: BGP  ) or Blockbuster (NYSE: BBI  ) . But these glimmers of hope from Sears shouldn't lull investors into a false sense of security. If anything, they might give Sears shareholders a great opportunity to cut and run.

Considering the ruthless competitive landscape in retail, it's a miracle that Kmart was able to perform as well as it did during the holidays. Tough rivals in the discount segment abound, including Wal-Mart Stores (NYSE: WMT  ) , Target (NYSE: TGT  ) , and Costco (Nasdaq: COST  ) . I'd argue that all three of those names have much stronger brands and customer loyalty than either Sears or Kmart.

Regardless of whether famed hedge fund manager and Sears chairman Eddie Lampert is involved -- his mere presence often seems to make some investors bullish about Sears' future -- Sears and Kmart are both old-school names that lost their brand luster a long, long time ago. Lampert's long-expected magic hasn't really improved operating performance at Sears.  

This stock's too pricey!
Meanwhile, recent investor euphoria over Sears has turned it into an overpriced retail stock doomed to stumble. Like Abercrombie & Fitch (NYSE: ANF  ) , there's a massive disconnect between its operational performance and the surge in its share price.

Sears' shares are up 136% in the last 12 months. Even if you include Sears' earnings projections of $3.36 to $4.06 per share for the upcoming quarter, the company's still trading at 44 times earnings at best, and 64 times earnings at worst. Given its still-plunging sales, this stock's been boosted on little more than hope.

Consider a few of Sears' key metrics compared to major rivals:

Company

P/E (TTM)

Forward Full-Year P/E

PEG Ratio

Sears

N/A

45

4.3

Wal-Mart

16

14

1.3

Costco

24

18

1.5

Target

18

14

1.1

*All data from Yahoo! Finance as of Jan. 19, 2010.

Sorry, folks. Sears clearly looks like the massive, overpriced loser when compared to its major rivals in the discount retail space. Check out its crazy forward price-to-earnings ratio and the astronomical PEG ratio. (Not to mention its "not applicable" trailing P/E, since Sears hasn't even been profitable in the last 12 months!)

Sears couldn't seem to pull off its long-promised turnaround even during economic boom times. Will it really fare better during a major recession? Sears fans who hope the company can surprise analysts with its future growth may be pinning their hopes on a feat far beyond the company's reach. Fools, beware.

A terrible stock for 2010?
Keeping a stock like Sears in your portfolio could be the kind of mistake that costs you a fortune. Who wants to have that kind of regret when contemplating their new year's resolutions for 2011?

There are obviously cheaper stocks out there with far better historical growth (and more growth potential), not to mention superior brands and customer loyalty. As I pointed out in the table above, Wal-Mart, Costco, and Target all look like far more reasonable stocks for investors' portfolios.

Now it's your turn to chime in on the worst of the worst. Vote in the poll, and let us know whether you think Sears will crash and burn in 2010.

What do you think is the worst stock for 2010? See the rest of our contenders and cast your vote!

Sears Holdings, Costco, and Wal-Mart are Motley Fool Inside Value selections. Costco is a Motley Fool Stock Advisor recommendation. The Fool has a bear put spread on Abercrombie & Fitch and owns shares of Costco. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 21, 2010, at 3:46 PM, rantall wrote:

    As usual, the Fools are right on regarding Sears. They have been cutting costs to the bone in an attempt to make the bottom line acceptable, but cannot make the top line improve. This is classic for companies in a death spiral. The pathetic sales improvement over a horrible 2008 is nothing to cheer about, yet the stock took off. How in the world does this company command a P/E in the stratosphere? You would think this was Apple or Google. They are a third-tier retailer who doesn't compare to a Target, Wal-Mart, Kohl's, Lowes, or Costco who are all direct competitors. When will the market wake up to the fact that Eddie Lampert has no clothes?

  • Report this Comment On January 21, 2010, at 3:51 PM, jayaen25 wrote:

    As speculation about the digital future of book publishing grab headlines, publishers are becoming more concerned about a company that could have an immediate impact on their business--Borders. In an article appearing on Debtwire, the financial news service reported that frustrated with the slow-paying practices of the retailer, a group of smaller publishers has hired the bankruptcy group of Lowenstein Sandler as legal counsel. A representative of Lowenstein, however, told PW that it has not been retained by any group. Debtwire quoted one publisher as saying some small publishers were having a hard time getting paid “in a timely fashion” and were contemplating taking some legal action.

    In response, a Borders spokesperson said “Borders Group has continued to pay its vendors and is not aware of any material disputes related to its December 2009 payments.” Interviews with a number of publishers, both large and small, by PW found Borders to be current with its payments, though one small publisher stopped doing business with the chain at the end of 2008 because of its fragile financial condition. And while one of the large publishers interviewed by PW said Borders was current “on our terms,” he nonetheless said the poor holiday performance and the continuing financial struggles of the chain was “very worrying.”

    Bgp will go BANKRUPT.Info by PW

  • Report this Comment On January 21, 2010, at 4:03 PM, rantall wrote:

    Borders has been on a death watch for the last 2 years. We are near the end.

  • Report this Comment On January 21, 2010, at 10:02 PM, jayaen25 wrote:

    Major Publishers now considering shutting off purchases to BGP for past due amountrs.

  • Report this Comment On January 24, 2010, at 2:06 PM, ikkyu2 wrote:

    Sears is an REIT. There's nothing left of their retail business, but they own a lot of their stores - and the land they sit on.

    Value it that way and it starts to make sense.

  • Report this Comment On March 12, 2010, at 12:03 PM, mdulcey wrote:

    Sears could recover as a retail business, but only by shedding a large percentage of what they do. (This would also mean shrinking the size of their stores by about 50%.) They should get rid of clothing -- who really thinks of Sears and clothing in the same sentence? -- and refocus on the strengths of their brand in tools and appliances.

    Their other option would be to close the stores completely, and move the Craftsman and Kenmore brands into other stores. Moving the tools into other stores would be a hard sell, though, because the big-box home supply stores already have their own house brands and they might perceive Craftsman as a competitor to those.

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