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Why Sears Holdings Stock Was Rallying Thursday

By Jeremy Bowman - Dec 7, 2017 at 12:28PM

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Shares of the ailing retailer jumped after an investor called for the company to look into strategic alternatives like going private.

What happened

Shares of Sears Holdings (SHLDQ) were surging this morning after an investor sent an open letter to the retailer's board, calling for the company to go private and for an investigation into recent short-selling. As a result, Sears shares were up 8% as of 11:16 a.m. EST.

The exterior of a Sears store

Image source: Sears.

So what 

Memento, a value-investing group owned by the Swiss-based Spadone family with 2 million shares in Sears, sent the letter this morning, arguing that excessive short interest has restricted the stock's float, making it difficult to buy shares, which it believes has been a primary cause of the stock's volatility over the last two years and has pressured the stock lower.

It asked the board to investigate the short-selling activity, called for a temporary halt in short sales, and also said the company should evaluate strategic alternatives, including going private.

Now what 

The idea of going private seems to be the biggest boon for Sears' shareholders -- CEO Eddie Lampert, who is already the company's largest shareholder and has his own hedge fund, ESL Investments, could take the company private if he wanted to, especially now that Sears' market cap is less than $500 million. Instead, Lampert seems to be positioning himself to capitalize on Sears' assets in a bankruptcy by making loans to the company and spinning off 241 stores into Seritage Growth Properties (SRG 3.65%), a Real Estate Investment Trust. 

Going private would alleviate many of Sears' problems, including Lampert's war with the media, damage to the company's reputation from its publicly reported losses, and the rampant short-selling. It would also improve the company's image and likely gain it credibility with suppliers who have been abandoning it as Lampert, or another buyer, would be putting his full faith behind the company.

Sears has not yet responded to the letter. While Memento's argument doesn't help the underlying business, the notion of the company going private should put a floor on the stock for the time being.

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Stocks Mentioned

Sears Holdings Corporation Stock Quote
Sears Holdings Corporation
SHLDQ
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