Describing Sears Holdings (SHLDQ) as a controversial stock would be a gross understatement. It is a polarizing stock, either despised or loved -- there really is no middle ground. Simply put, there are the retail bears and the real estate bulls. So when Sears' stock recently surged about 20% in a two-day span on higher than normal volume, I immediately began to search for the catalyst.
The Sears bull thesis:
Actually, the bulls also see billions of dollars from Sears monetizing Craftsman, DieHard, Kenmore, Lands' End, Shop Your Way, Sears Online, and Sears Homes services, the largest book of service contracts in America. None of the aforementioned business segments require a huge bricks and mortar footprint. That fact paves the way for the selective redevelopment of the huge Sears/Kmart real estate portfolio. Cha-ching!
The Sears bear thesis:
The retail bears are quick to point out that Sears is bleeding substantial cash each quarter from retail operations, has declining same store sales, a lack of investment in updating retail stores, legacy pension obligations, a poor bond rating, and point to CEO Eddie Lampert's total lack of experience in managing big box retail operations. This will inevitably lead to a death spiral, leaving shareholders in dire straits. Yikes!
Did anything change on Monday?
Well, depending upon what you believe, either almost everything or almost nothing changed. The majority of Sears common shares are owned by CEO Eddie Lampert and ESL, the hedge fund that he controls. Several other hedge funds have very large stakes: Fairholme Capital Management (19.2%) run by Morningstar hedge fund "manager of the decade" Bruce Berkowitz; Index Funds holds (7.5%), with 7 other funds controlling (11.4%), including Los Angeles-based hedge fund Baker Street Capital Management.
David Faber pointed out on a CNBC video on Sept. 11, 2013 that effectively "90% or so of the shares are pretty much not trading. You've got a 10% float, a 14% short position and it isn't that hard to create quite a bit of a short squeeze."
Here is what did happen on Monday
Baker Street unveiled a 139 page presentation, "The Case For Sears Holdings (SHLD)."
Here are some of the points that they chose to highlight:
- Baker Street's property-by-property real estate appraisal found that at least $7.3 billion of value lies at the top 350 owned and 50 leased properties
- Real estate value is starting to be actively unlocked
- According to REITs and mall owners, demand and pricing for space in high quality malls where Sears owns space is at an all-time high
- At ~$44/share Sears sells for ~1/3rd of break-up value, offering substantial upside, even in scenarios where retail operations are wound down
- Break-up value is relevant because Eddie Lampert, Chairman and CEO, has intimated that he will look to realize Sears' sum-of-the-parts value if profits and returns on capital don't improve
Why the Baker Street Case is compelling
What is incredibly powerful is that they hired appraisal firms to appraise the entire Sears real estate portfolio! That is a gargantuan task, not likely to be replicated in the near term by any of the Sears detractors.
Sears Holding real estate initiatives
Back on July 17 I wrote a piece for Motley Fool readers describing the initiatives that have been launched by Sears to begin to monetize its massive real estate holdings. These initiatives included:
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- In May of 2013 Sears launched Ubiquity Critical Environments as both a real estate and technology initiative. Ubiquity is focused on converting 330 closed Sears and Kmart stores into facilities for data warehousing, network co-location centers, and business continuity operations. Ubiquity can follow the model of companies like Digital Realty(DLR 0.63%), the largest data storage REIT, which has over 123 properties containing 23 million square feet of space.
- Ubiquity is also spearheading a new initiative to build and lease communication towers at existing Sears Holding facilities. This can be a very profitable business. The largest global operator of communication towers is American Tower(AMT -0.26%), which is reporting operating margins above 70% in the U.S. market.
- Sears also launched Seritage Realty Trust in 2013 as a nationwide developer of commercial real estate to help oversea a Sears portfolio containing over 200 properties in 33 states, totaling over 18 million square feet.
Investor takeaway
Even with the 20% jump in stock value seen on Sept. 9, 2013 and Sept 10, 2013, Sears Holdings market capitalization is only $6 billion -- less than the Baker Street low estimate of $7.3 billion of real estate value alone. That said, Credit Suisse analyst Gary Balter just reiterated his underperform rating on Sears – with a price target of $20.00. Ouch!
If you are an investor interested in Sears, I urge you to read the 139 page Baker Street presentation. Also, please check back later this week, when I will write an article focused on the Baker Street real estate analysis, and what it could mean for Sears Holdings shareholders moving forward.
