Buy Wal-Mart Like Buffett, Not Sears Like Lampert

There'll never be another investor like Warren Buffett.

Hedge fund manager Eddie Lampert proves this more and more with his dismal performance as chairman of Sears Holdings (Nasdaq: SHLD  ) . Foolish investors should follow Buffett by staying away from Sears and loading up on shares of its rival, Wal-Mart (NYSE: WMT  ) .

You're good, kid, but I'll always be the best
Earlier this year, Wal-Mart fell to the low $50s due to the negative press from a foreign bribery scandal. Buffett took advantage of that opportunity and bought heavily. That was shrewd investing, as Wal-Mart is now trading in the mid $70s. The sixth largest holding ($3.46 billion) in the Berkshire Hathaway (NYSE: BRK-A  ) portfolio, Wal-Mart is everything that Sears is not.

Wal-Mart's net profit margin of 3.60% for the past five years is far superior to the industry average of 2%. The earnings-per-share growth rate and dividend yield for Wal-Mart both top the industry average, too.

Metric

Sears

Wal-Mart

Industry Average

Net Profit Margin (5-year avg.)

(0.08%)

3.60%

0.10%

Earnings-per-Share Growth (5-year)

(37.39%)

9.04%

(5.98%)

Dividend Yield

0.00%

2.10%

1.80%

Source: Motely Fool CAPS.

Once there was hope
While Wal-Mart is considered to be one of the best-managed companies in the world, Lampert was selected as "The Worst CEO" in 2007 by MarketWatch even though he is not the chief executive officer. Lampert, the billionaire founder of the hedge fund ESL Investments, formed Sears Holdings in 2005 by merging Sears with Kmart. Many expected Sears to follow Buffett's model at Berkshire Hathaway and buy undervalued assets that increase in price to reward the shareholders. That didn't work. Rather than buying other companies as Berkshire Hathaway does, Sears has been forced to increase its debt and peddle its best assets, with clothing unit Lands' End now up for sale.

This has naturally hindered the company's performance. Both sales growth and earnings-per-share growth are falling for the slumping retail giant. While the return on assets and return on investments for department stores are in a bullish upswing overall, for Sears both are heading south in a bearish trend.

Metric

Sears

Wal-Mart

Industry Average

Sales Growth (MRQ)

(8.40%)

5.70%

2.90%

Sales Growth (TTM)

(4.10%)

5.70%

3.00%

Sales Growth (5-year)

(4.44%)

4.18%

(1.41%)

Source: Motley Fool CAPS. MRQ = most recent quarter. TTM = trailing 12 months.

Look outside Sears for growth, value, and income
Lampert most likely didn't anticipate how badly the Great Recession would wound Sears and its real estate holdings. Over the last five years, earnings-per-share growth and sales growth has declined for Sears, with its market cap falling about two-thirds. While Lampert was hardly the only one to suffer from the Great Recession, Wal-Mart has emerged stronger, picking up market share from weaker rivals while expanding in both business lines and territory.

For income investors, Sears has nothing to offer as it doesn't pay a dividend. Wal-Mart, by contrast, not only has an above-average dividend of 2.10%, but also has increased the amount annually for the past 25 years, which makes it a "Dividend Aristocrat."

It's still buy low, sell high
Both Wal-Mart and Sears have risen in recent market action, though. Much of the jump in Sears can most likely be attributed to the recent $126.2 million purchase of shares by Lampert and the short-term reaction of Wall Street. Lampert could be buying so heavily to "bust the short." While a short position of 5% is considered to be troubling for a company, Sears has one of 9.62%. By contrast, the short position for Wal-Mart is tiny.

Foolish investors should wait for the dips, and if I were you, I would only buy Wal-Mart. Buying on the decline will reward investors with a higher dividend yield and a greater total return for the long term from Wal-Mart than from Sears.

Warren Buffett's long track record of success has made him one of the best investors of all time. With Buffett at the helm, Berkshire Hathaway has grown book value per share at a compounded annual rate of 19.8% for nearly 50 years! Despite an incredible historical track record, investors have to understand the key issues to watch moving forward. To help investors, the Fool's resident Berkshire Hathaway expert, Joe Magyer, has created this premium research report on the company. Inside you'll receive ongoing updates as key news hits, as well as reasons to buy or sell the stock. Claim a copy by clicking here now.

Jonathan Yates has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.


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