World's Scariest Stock: Sears Holdings

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It's not just things that go bump in the night that you need to be afraid of, but also the monsters lurking in your portfolio that can give you the shakes. Just ask investors in Sears Holdings (NASDAQ:SHLD), because they know what a scary stock the retailer has been. Even at these depressed prices, it holds monstrous potential to haunt you for years to come.

George Romero's zombie hit Dawn of the Dead showed the slack-jawed undead attracted to a mall, perhaps in some primal remembrance of how their lives used to be. That's how the once-venerable retailer must be feeling these days. At a time when Wal-Mart Stores (NYSE:WMT) has been surprising analysts with same-store sales that meet or exceed expectations, Sears Holdings hasn't posted a single quarter with rising comps in the three years since emerging from bankruptcy.

For a discount retailer, that has to be especially painful -- but then again, zombies don't feel pain.

Lampert the Reanimator
Yet painful it has been. Like a modern-day Dr. Frankenstein, Sears Holdings Chairman Eddie Lampert has been trying to cobble together a living being, one rotten corpse at a time, much as Warren Buffett did with ailing textile mill Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B). First, Sears merged with a failed Kmart and then tried to pick up fading home-decor specialist Restoration Hardware.

It's been a long time since the Oracle wannabe displayed any of his "Lampert magic," though. His use of total return swaps has seemingly failed more times than it has worked in Sears Holdings' favor, and the idea that the retailer may have been some kind of asset play with valuable real estate in prime locations has faltered as the commercial market collapsed and credit remains in a deep freeze.

Bring out your dead!
Too often, it seems Lampert has resorted to using share buybacks to prop up earnings, both at Sears Holdings and at his other fiefdom, AutoZone. In both cases, hard-earned capital was squandered on buying up overpriced shares instead of investing in the stores. Over the past year, Sears Holdings has spent more than $1.35 billion buying back some 11.5 million shares, for an average cost of $117 each. Today, the stock trades around $50 a share. The vaunted cash balances that once exceeded $4.4 billion now register at just over $1.5 billion.

Malls have become ghost towns as consumers strive to stretch their dollars as far as they can. When you can save even more money by shopping at Wal-Mart or Costco (NASDAQ:COST), why go to Sears? As fellow Fool Richard Gibbons points out, things are going to get worse as even retailers such as Target (NYSE:TGT) -- a brand slightly more happening than Sears -- suffer from declining comps.

At 27 times next year's earnings, Sears Holdings trades at three times the valuation of midmarket retailers such as Kohl's (NYSE:KSS) and J.C. Penney, yet it may still induce the kind of chills investors don't need in these markets.

A place for ghost stories
Do you agree with me that buying Sears Holdings stock is a scary thought and that the aging retailer is the World's Scariest Stock? If so, join with me over at the investor-intelligence community Motley Fool CAPS and select Sears Holdings to underperform the market. You can lay out your creepy tale and let us know you find there are more tricks than treats in this stock. Then come back in a week to find out who has won the dubious distinction of being the World's Scariest Stock.