Which 10 companies should you keep out of your portfolio? Find out in our special series on the Worst Stocks for 2009.
Sears Holdings
So why name it the worst stock for 2009? Berkowitz's bullish pitch says it all. Quoting from his March 2008 interview with U.S. News and World Report:
Sears has a great real-estate portfolio, and people are behaving as if it can only be used as retail space ... People aren't looking at it in the right way. They are measuring it based as a retailer, and they are measuring it based on short-term net income profitability. But there are many more dimensions to Sears. Real estate can have a higher and best use. Today's anchor to a mall can be tomorrow's multipurpose, multiuse building where you can have office buildings, retail, and residential spaces.
Do you want to be a real estate speculator right now? Me either.
Because the housing market worked out soooo well ...
The numbers don't favor it. Sales of commercial property here in the U.S. fell by 70% last year, said real estate services firm Jones Lang LaSalle
Will it get better? Sure, someday. Bart Steinfeld, a Jones Lang LaSalle managing director, stated, "The beginning of a new presidential administration and new aggressive monetary policies should increase certainty into the debt markets by mid-2009, but the CMBS market as we knew it in 2006-2007 is gone."
Therein lies the problem. Even if Sears is as excellent a long-term bet as Berkowitz thinks, cashing in probably demands a lot more liquidity than exists in the real estate market right now.
Put differently: What bank would back the developers who'd creatively transform all that valuable property -- Bank of America
And where's the market for office space when Home Depot
It's a market only a masochist could love.
Sell! Sell! Sell!
Sears Holdings insiders aren't that brave. One insider, in particular: Richard Perry, a board member since 2005 cashed in more than half his direct holdings in December.
So far, Perry is the only insider to sell since the crisis began early last year. But his sales are more interesting than others because he's a professional investor. Actually, he's better than that. Chairman Eddie Lampert called Perry an "accomplished investor" in a press release announcing his appointment to the board of Sears Holdings.
Berkowitz is an accomplished investor, too, of course. But I can't really fault Perry's timing. Sears is stuck with property it won't be able to sell or redevelop soon and isn't doing much with what remains, a scary retail operation:
|
Metric |
Last 12 Months |
FY 2008 |
FY 2007 |
FY 2006 |
FY 2005 |
|---|---|---|---|---|---|
|
Return on invested capital |
3.1% |
6.2% |
9.2% |
11% |
14.1% |
|
Normalized net margin |
0.8% |
1.7% |
2.8% |
2.2% |
2.4% |
Source: Capital IQ, a division of Standard & Poor's.
Not only are returns on capital declining, they've also reached a level where Sears is an almost certain value destroyer. Its cheapest debt -- due next month, according to Capital IQ -- carries a 5.7% coupon rate.
But this can't be too surprising. Lampert has orchestrated a series of capital-destroying share buybacks instead of using excess cash to improve stores. We're now supposed to believe that he's suddenly become a brilliant capital allocator? Balderdash.
Shareholders face a difficult choice. Sell now, or hope that Sears' retail operation holds on long enough for the real estate market to turn around and deliver the gains that Berkowitz and our Inside Value team promise.
Which would you choose? Click here to rate Sears "underperform" in CAPS if you'd sell, or choose "outperform" if you'd hold. And be sure to return next week when our editors reveal the Worst Stock for 2009.
