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Has Eddie Lampert Lost His Touch?

Consider the following scenario: A great company faces a languishing stock price. A few quarters of managerial efforts fail to revive profits. The stock continues to decline. As a result, the CEO is ostracized for having lost his ability. Sound all too familiar?

During the Internet era, this exact scenario was being exacted on Warren Buffett. Buffett's company, Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) , was failing to outperform the darlings of the day like Cisco (Nasdaq: CSCO  ) and Yahoo! (Nasdaq: YHOO  ) , so Buffett was perceived as having lost his acumen. Individuals with no investing experience were earning returns better than Buffett, and it was puzzling that the "Oracle of Omaha" could not see the "value" in investing in the Internet. Apparently, while focusing on the short term, the media and analysts had forgotten that Buffett had increased Berkshire's book value by more than 20% annualized for decades. Instead they were advocating triple-digit P/Es and double-digit price to book ratios, respectively.

Those who forget history ...
We know how the story played out for Berkshire. Those who stuck alongside Buffett -- and there were many -- continue to be rewarded. Of course, Berkshire will probably never deliver the same returns as when it was much smaller, but Berkshire -- at the right price -- should continue to outperform the market.

Those who continue to kick themselves for abandoning Buffett may have a second chance, though. Eddie Lampert, hedge-fund-manager extraordinaire, is currently trying to right the ship at Sears Holdings (Nasdaq: SHLD  ) . Shares in retailer Sears, of which Lampert is chairman, currently trade at 50% below their 52-week high. Factoring into this decline are economic concerns, which have taken their toll on all retailers. People are worried about the decline in housing prices, with folks becoming a little more attentive to the girth of their wallets. Even credit card companies have started to notice a slight uptick in late payments. So, in the near term, the company's outlook seems a bit murky.

... are often doomed to repeat it
But Lampert seems intent on trying to fix Sears, as he has recently announced his plans to divide the company into five divisions. But the retailing business is tough. You constantly have to adapt to consumer tastes and competition from all sides. Yet those who are looking at Sears from only the retail side might be missing the bigger picture.   

Eddie Lampert is a brilliant capital allocator. It's been said that after he left Goldman Sachs (NYSE: GS  ) to start his hedge fund, he spent hours upon hours reverse-engineering some of Buffett's earlier investments. Lampert clearly "gets it." He knows that in order to create value, you have to earn higher returns than your cost of capital. And given that he owns nearly 50% of Sears shares, and has been using the company's cash flows to continue to buy back shares as they decline, the odds for success go up tremendously. And for what it's worth, Lampert has had great success in long-term investing in retailers, most notably his investment in AutoZone (NYSE: AZO  ) .

You're in good company
Some very shrewd investors are heavily invested in Sears because of their confidence in Lampert. Bill Ackman of Pershing Square and Bill Miller at Legg Mason have built up positions. Most recently, value investor Mohnish Pabrai reported a position in Sears. Pabrai's investment in Sears is notable, because he typically avoids investing in retail businesses. So I doubt very much that Pabrai sees Sears as merely a retailer.

You decide
Amid the weakness in its business operations, there are a lot of positive indicators suggesting Sears will create value over the long term. The big bet right now is on Lampert. His past endeavors suggest that it's not a wise bet to go against him. As always, do your own work on this one, but it certainly doesn't hurt that a lot of smart and savvy money would be invested alongside you, should you decide to buy.

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  • Report this Comment On January 23, 2009, at 12:51 AM, joshzz wrote:

    Here's the deal!

    Eddie Lampert and all the rest of those from Yale, Harvard, etc. don't get it. They actually hold to the belief that the business model being taught at those schools has credibility.

    This country is literally in the toilet because of the foolish wisdom they adhere to. Bush and his administration along with thousands of those heading business in the US subscribed to such foolish notions.

    It will never work!

    China is going to take over this nation because of our adherence to such principles.

    They only use the US, undercutting the world in pricing etc.. They want our technology, our knowledge and military know-how to take-over the US.

    It's going to happen. They want to have complete financial control. and they are nearly there. We borrow from them. they are producing our medicines, our electronics, our clothing, etc. .. The money goes to mainly to China..Sure the mulinational businesses get their cut but China has real purpose in profits. US business savors profits to feed the greedy desires of their CEOs etc.. Nothing gained.

    The only thing stopping China from taking over the US and for that matter much of the world is the fact that the US has a stronger military.. However China is putting 500 new engineers into defense for every one that US seeks to employ. The scales are turning.

    They are presently developing new weapons systems that we cannot challenge. They recently tested a special missile that shoots down satellites with pin point accuracy.. Why do you think they need that?

    They will have the money, the military and the fuel.. The mulitnational businesses will provide them the fuel to wipe us out.. Expect the oil companies to turn against the US in war.. they're only in it for the money anyway and China will have it all.

    At some point, China will grow tired of the businesses and take control of all of them. Expect that they will invite the heads of all the corporations to a special huge conference never seen in the history of business. They will turn their people against these businesses and justify the elimination of all of them. They will then take over the businesses, attack and destroy many nations, possibly just by poisoning our people with food, medications, and beverages manufactured in China.

    This is the most convenient way to go as it leaves the land ripe and minimizes the loss of their soldiers.

    Hopefully, Barack Obama will realize the real threat we face by China and turn this nation around. Bush, Cheney and company though they truly wanted to keep terror out of the US, just didn't realize the threat to our nation that China poses.

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