Buy, Sell, or Hold: Sears Holdings

If you think you had a rough go of it in 2011, always remember that Eddie Lampert was right there with you! Lampert, who has often been compared with a young Warren Buffett, has roughly 30% of his portfolio apportioned to Sears Holdings (Nasdaq: SHLD  ) , and considering that Sears stock lost 57% last year, it was also a year to forget for this investing prodigy as well.

Despite the terrible year, traders on both sides of the coin have reason to be excited about Sears Holdings in 2012. Let's take a look at some of the things that could make you want to buy, sell, or possibly hold Sears this year, and at the end I'll weigh in with my take.

Buy
If you're a Sears bull, you're clearly championing the company's efforts to trim the fat by closing 120 underperforming Sears and Kmart locations and continuing to build its online presence.

In the third quarter, despite the wider-than-anticipated loss, Sears pointed to strong 20% sales growth in its domestic online business and growth in same-store sales in its Sears apparel line. That actually is pretty impressive considering the troubles that similarly priced apparel retailers have dealt with. Similar price-point apparel stores Aeropostale (NYSE: ARO  ) and American Eagle Outfitters (NYSE: AEO  ) have both struggled to control their inventory levels and have been forced into deep discounts to move their remaining stock. Sears hasn't exactly been lighting it up in the apparel department, but clearly sales are heading in the right direction, unlike these clothing rivals. Trading at less than half of its book value, Sears represents a compelling turnaround candidate.

Sell
If you're on the other side of the coin, you're probably just chalking up the losses and wondering how high Sears can run its debt load before its forced to seek bankruptcy protection.

Sears turned a $1.1 billion free cash flow inflow in 2010 into a greater than $300 million outflow in 2011, and it looks unlikely that the company will be able to turn a profit anytime soon. Even worse is how quickly the company's cash balance is deteriorating. In January 2011, Sears had a cash balance of $1.4 billion and debts totaling $3.5 billion. As of its last quarter, Sears' cash balance had dwindled to just $632 million and its outstanding debt had ballooned to $4.6 billion. Short sellers clearly see this as a slippery slope toward eventual failure.

Hold
If you're currently holding Sears shares, you're doing so because it represents a book value and brand-name department store bargain next to Kohl's (NYSE: KSS  ) and Target (NYSE: TGT  ) .

At 1.9 and 2.2 times book value, respectively, Kohl's and Target command a considerably higher price tag than Sears at just 48% of book value. In addition, Kohl's December same-store sales dropped 0.1% over the year-ago period and Target's weak sales forced the company to lower its EPS guidance. For holders of Sears' stock, if everyone in the sector is suffering, they've chosen to put their money behind the stock that could have the largest bounce when the sector rebounds.

The verdict
It's really hard to twist very many positives out of Sears Holdings' current situation. Its cash is dwindling at an alarming rate and the company's decision to close underperforming locations simply won't be enough to save it from continued annual losses. The Sears and Kmart brand names are worth something, but I find it unlikely that anyone would step up to the plate and make a bid for the ailing retail chain. Sears' best path to righting its ship is to reorganize under bankruptcy protection -- something that I feel could happen in the next one to two years. With that being said, I'm maintaining my CAPScall of underperform on Sears on CAPS.

What's your take on Sears Holdings? Share your thoughts in the comments section below, and consider adding Sears Holdings to your free and personalized watchlist so you can keep track of the latest news with the company.

And if you're looking for one more great idea to start off the new year, consider downloading a copy of our latest special report, "The Motley Fool's Top Stock for 2012." This report highlights a company that our top analysts have dubbed the "Costco of Latin America." Best of all, this report is completely free to you for a limited time, so don't miss out!

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. The Motley Fool owns shares of Aeropostale. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always rated a buy.


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