55 Years Later, Sears and the S&P 500 (Finally) Part Ways

The timing seems odd: With a 67% increase in share price this year under its belt, Sears (Nasdaq: SHLD  ) gets booted from the S&P 500. And you know what? It’s about time.

There are a number of retailers, including Target (NYSEL TGT), Wal-Mart (NYSE: WMT  ) , and the under-appreciated Kohl’s (NYSE: KSS  ) , performing admirably, in spite of tough economic circumstances. Sears? A look at the former industry bellwether’s Q2 speaks volumes. It’s ecstatic with mediocrity, has an excuse lined up and ready for each negative result, but "…continues to make progress…," according to CEO Lou D’Ambrosio.

Bye, bye Sears
It was 1957 when the S&P was formed, with Sears as one of the flagship members. Here we are, 55 years later, and the S&P has become one of the leading indices in the world. Sears, on the other hand, has been relegated to a retail industry afterthought.

The official party line for dropping Sears from the S&P fold was the lack of float. In other words, the 90% of the company owned by money managers Eddie Lampert and Bruce Berkowitz left too little for outside investors. Though the two investment professionals haven’t taken Sears private (yet), with a mere 11 million of the 116 million shares available for public trading, it may as well be.

The dichotomy of 2012
Even with the drop in stock price following the S&P de-listing announcement on Thursday, Aug. 30, Sears remains one of the best performing investments of the year. How can that be, you ask? It’s certainly not based on performance.

The ever-so-slight improvements Sears has reported this year came, in large part, on asset sales and divestitures. With a number of property sales In Q1 driving results, Sears seemed more a commercial real estate company than a $5.75 billion retailer. And there are more asset sales to come before 2012 winds down.

The decrease in losses reported in Q2 of this year was great to see if you’re a Sears fan. Unfortunately, as nicely as Sears’ management presented the earnings information, much of the "improvement" is due to an effective tax rate that’s less than half 2011’s.

Sears Canada continues to be a drag on results, including the nearly 2% drop in gross. Not surprisingly, Sears will once again become a commercial realtor and seller of assets the second half of this year. Plans are to complete the spin-offs of its Hometown and Outlet stores, along with much of Sears Canada. Both moves should help bolster a weakened balance sheet, and address the margin problems.

Sears was quick to point out an improvement in inventory control, an area woefully managed in earlier quarters. However, the decrease of $512 million in inventory vs. Q2 of 2011, was due to the closing of several stores, not improved efficiencies.

Why the run-up?
With all of the above, you may wonder how in the world does Sears stock appreciate nearly 70% this year? A few reasons. One, even with the year-to-date increase, Sears’ stock price remains 10% below where it was this time last year. So, January of 2012 saw rock bottom stock prices, which brings out value investors and contrarians.

Second, and more importantly, was the hope (and prayer) that Lampert and Berkowitz would take the company private, paying shareholders a tidy premium. Third, there’s discussion that core assets, including Kenmore and Craftsman, are going on the auction block. If so, it’s a quick way to unlock additional shareholder value.

What’s an investor to do?
As the latest consumer and housing numbers indicate, there is a slow economic improvement taking hold. The retail industry will continue to benefit, as consumers loosen their pocketbooks, particularly Wal-Mart, Target, and Kohl’s. Why? Same store sales figures continue improving, all have conservative valuations suggesting appreciation potential, and shareholders receive a dividend yield in the 2.5% range.

As for Sears, run away. As far as you can, as fast as you can. Betting on Lampert and Berkowitz has Sears where it’s at, but it’s time to take your money off the table.

There are a lot of retail investment opportunities out there. Finding the option that makes sense for you and your portfolio is critical. One retailer that often flies under the radar is Whole Foods. For an in-depth look at the opportunity, and the risks, take a look at our premium report on Whole Foods Market

Fool contributor Tim Brugger currently holds no securities positions, including any mentioned in this article. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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