Many consumers seem to have forgotten that Sears and Kmart even exist. Once 2010 is done, Sears Holdings (NASDAQ:SHLD) shareholders may want to forget, too. A few promising signs do suggest that the retailer could still escape a Circuit-City-like fate -- but even so, its shares remain way too expensive. I predict 2010 will be a sad year for this stock.

Better isn't good enough
Sears investors recently got very excited when the company announced that December same-store sales squeaked up by 0.4%. In addition, impressive comps strength at Kmart actually offset weakness at its namesake Sears stores. The company was also able to increase its fourth-quarter earnings guidance to a much greater profit projection than analysts had been expecting.

These are admittedly heartening signs that Sears might not be quite as bad off as struggling retailers like Borders Group (NYSE:BGP) or Blockbuster (NYSE:BBI). But these glimmers of hope from Sears shouldn't lull investors into a false sense of security. If anything, they might give Sears shareholders a great opportunity to cut and run.

Considering the ruthless competitive landscape in retail, it's a miracle that Kmart was able to perform as well as it did during the holidays. Tough rivals in the discount segment abound, including Wal-Mart Stores (NYSE:WMT), Target (NYSE:TGT), and Costco (NASDAQ:COST). I'd argue that all three of those names have much stronger brands and customer loyalty than either Sears or Kmart.

Regardless of whether famed hedge fund manager and Sears chairman Eddie Lampert is involved -- his mere presence often seems to make some investors bullish about Sears' future -- Sears and Kmart are both old-school names that lost their brand luster a long, long time ago. Lampert's long-expected magic hasn't really improved operating performance at Sears.  

This stock's too pricey!
Meanwhile, recent investor euphoria over Sears has turned it into an overpriced retail stock doomed to stumble. Like Abercrombie & Fitch (NYSE:ANF), there's a massive disconnect between its operational performance and the surge in its share price.

Sears' shares are up 136% in the last 12 months. Even if you include Sears' earnings projections of $3.36 to $4.06 per share for the upcoming quarter, the company's still trading at 44 times earnings at best, and 64 times earnings at worst. Given its still-plunging sales, this stock's been boosted on little more than hope.

Consider a few of Sears' key metrics compared to major rivals:



Forward Full-Year P/E

PEG Ratio

















*All data from Yahoo! Finance as of Jan. 19, 2010.

Sorry, folks. Sears clearly looks like the massive, overpriced loser when compared to its major rivals in the discount retail space. Check out its crazy forward price-to-earnings ratio and the astronomical PEG ratio. (Not to mention its "not applicable" trailing P/E, since Sears hasn't even been profitable in the last 12 months!)

Sears couldn't seem to pull off its long-promised turnaround even during economic boom times. Will it really fare better during a major recession? Sears fans who hope the company can surprise analysts with its future growth may be pinning their hopes on a feat far beyond the company's reach. Fools, beware.

A terrible stock for 2010?
Keeping a stock like Sears in your portfolio could be the kind of mistake that costs you a fortune. Who wants to have that kind of regret when contemplating their new year's resolutions for 2011?

There are obviously cheaper stocks out there with far better historical growth (and more growth potential), not to mention superior brands and customer loyalty. As I pointed out in the table above, Wal-Mart, Costco, and Target all look like far more reasonable stocks for investors' portfolios.

Now it's your turn to chime in on the worst of the worst. Vote in the poll, and let us know whether you think Sears will crash and burn in 2010.

What do you think is the worst stock for 2010? See the rest of our contenders and cast your vote!

Sears Holdings, Costco, and Wal-Mart are Motley Fool Inside Value selections. Costco is a Motley Fool Stock Advisor recommendation. The Fool has a bear put spread on Abercrombie & Fitch and owns shares of Costco. Try any of our Foolish newsletters free for 30 days.

Alyce Lomax does not own shares of any of the companies mentioned. The Fool has a disclosure policy.