Don't Mess With Eddie Lampert

Sears Holdings (Nasdaq: SHLD  ) chairman and hedge fund manager Eddie Lampert has taken his lumps lately, as his merger of retailers Sears and Kmart continues to struggle. But while this brilliant investor may seem down, only a small-f fool would entirely count him out.

A bit of background
After breezing through Yale University, Lampert began his career at Goldman Sachs (NYSE: GS  ) where he was mentored under future Secretary of the Treasury and current Citigroup (NYSE: C  ) Chairman Robert Rubin. Never one to follow the crowd, a 25-year-old Lampert decided to strike out on his own -- against Rubin's advice -- and start his own hedge fund.

Lampert then gained the respect of billionaire Richard Rainwater, who funded Lampert's hedge fund, ESL Investments, with $28 million in seed money. Not a bad first day at the office.

Since forming ESL in 1988, Lampert has produced purported returns of 29% per year, turning an original $1 million investment into $230 million today. With results like these, it isn't hard to see why so many people have already deemed Lampert "The next Warren Buffett."

Not too shabby
Lampert's investing style stays close to that of his hero Buffett. He's neither a trader nor a speculator. He's a businessman at heart, with a passion for purchasing companies on the cheap and holding them indefinitely.

That's exactly what he did in 2004 with embattled retailers Kmart and Sears. Everyone else had all but given up on these firms, each feverishly losing ground to competition from Wal-Mart (NYSE: WMT  ) and Target (NYSE: TGT  ) . Lampert saw an opportunity to merge the two diminished companies, sell underperforming stores, cut costs, and milk the new company for cash. He could even use the cash for investments in other realms of the finance world at his discretion.

Sound familiar? It isn't too far off from what Buffett did with another failing company called Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) several decades ago. I need not remind you how that turned out.

You're buying what?
Lampert certainly surprised the market when he began purchasing Kmart from bankruptcy court back in 2003. The Buffett philosophy of investing puts little emphasis on turnaround situations, yet at the time, it appeared that was what Lampert had in mind. Perhaps the criticism was justified; when asked about his worst investments ever, Buffett himself has often quipped, "Buying Berkshire Hathaway probably wasn't a good idea."

While Berkshire has indeed turned out to be one of the most successful investments of all time, thanks to Buffett's investing prowess, the original Berkshire -- a Rhode Island textile mill -- would have undoubtedly turned out to be a flop.

Such may be the case with Sears Holdings, too. Since Lampert took over in 2004, the combined company has done a complete about-face, turning two companies on the brink of collapse into a money machine that has churned out billions in cash, which Lampert has used to retire debt and repurchase shares.

The results of Lampert's wizardry have been certainly been Buffett-esque in their own right. In four years, shares of Sears Holdings surged well more than tenfold, making Lampert a billionaire many times over.

Head for the hills? Please....
That is, until recently. Investors have become restless with Sears' progress. Its slowing sales and rising inventories show that customers have lost their affinity for Sears-brand merchandise. Add that to last Thursday's 99% drop in earnings, and the fact that few if any investors will argue that Kmart stands much of a competitive chance against Wal-Mart, and you start to wonder what Lampert's been smoking lately. Investors haven't been shy about their doubts, cutting Sears Holdings shares by nearly half since April. Easy come, easy go.

But is it really time to give up on Lampert and dump Sears Holdings like there's no tomorrow? Hogwash! Again, like Buffett, Lampert is a long-term investor, and while the results of the past few months certainly haven't been pretty, I can assure you that Lampert isn't losing much sleep over them. Regardless of the retail results, the real rewards will come down the line, when Lampert begins to put Sears Holdings' cash to work in other investments outside the retail world, as most expect him to do. Still, that will undoubtedly take time.

Lampert is an undisputed genius, and the ultimate success of the company certainly can't be measured in any 90-day time period -- but that's exactly what investors are currently doing. If you're looking to make money over any time period less than five years, you probably should stay away from Sears Holdings. But if you're in a the market for what is essentially an investment in one of the greatest investors of this generation, the recent turbulence in Sears Holdings could give you an exceptional opportunity to take part in one of the best ways to piggyback off a phenomenal investor.

Further Lampert-lit Foolishness:


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