Is Sears a Buy?

Penny-pinching shoppers have their eyes peeled for the red-letter "sale" sign these days. That should be a promising environment for a discount retailer -- but not if many consumers have forgotten it exists. That may be the case with Sears Holdings (Nasdaq: SHLD).

The stock has fallen off a cliff since early May, which might make it look like a steal to bargain-hunting investors. But instead, they should follow penny-pinching shoppers' leads, and erase this stock from their go-to lists.

A retail anachronism?
Sears Holdings, which also runs Kmart, long ago lost its luster. Once, it was an important provider of everything from clothes to consumer electronics to tools to appliances. But little by little, savvy, price-slashing competitors have eaten its lunch (and breakfast, and dinner, and midnight snack).

The litany of rivals killing off competitive advantage in Sears' various departments is long and formidable. There's price-slashing Wal-Mart (NYSE: BBY); Target's (NYSE: TGT) touch of class; customer-centric consumer electronics giant Best Buy (NYSE: BBY); and tool-slinging Home Depot (NYSE: HD). And let's not forget warehouse retailers like Costco (Nasdaq: COST), which offer tons of inexpensive stuff in bulk. They each have a well-established position in the retail market.

Where does Sears fit in? This crowded landscape has left many shoppers little reason to stop at Sears, much less remember its existence. Would anyone miss Sears if it disappeared tomorrow?

Just don't do it
Despite Sears' disadvantages, could it be a bargain stock anyway? Let's compare it to two biggies in the discount retail space, Wal-Mart and Target.

Source: finviz.com.

Sorry, Sears. That's a premium price tag for such anemic growth potential. Both Wal-Mart and Target look like screaming buys in comparison. Sears' PEG ratio is a huge red flag for investors in this case.

Consider Sears' history. It hasn't generated an annual sales increase since the fiscal year ended February 2007. Its same-store sales have been consistently weak, too. For a long while, it's been a risky stock because it lacked operational strength as an actual retailer. Its dwindling sales are testament to this weakness.

Retailers that can't grow sales are dangerous. While they may be able to boost profitability by cutting costs in the short term, the long term looks very risky if it can't get droves of customers in the door.

Hopefully investors have long expected hedge fund manager and Sears Chairman Eddie Lampert to be the company's saving grace. Alas, it shouldn't have been hard to predict that a hedge-fund guy trying to head up an ailing retailer wouldn't be a magic bullet.

When brands go bad
Sears is a retail name, but it sells such lackluster brands that it seriously may never turn things around. The stock doesn't even look like a dirt cheap bargain now, despite its precipitous drop since the spring. In July, I similarly asked whether lululemon (Nasdaq: LULU) was a buy. While I was concerned that the yogawear seller's growth might not be sustainable, at least it has experienced torrid growth, justifying investors' belief in its potential. That's not the case with Sears.

Is Sears a dud of a stock, or could some miracle still turn this retailer around? Would you buy it now? Sound off in the comment box below.