Let's be clear: You can make a lot of money following the moves of great investors. They have teams of analysts, endless resources, long experience, and great track records. Luckily, if they manage over $100 million, they must report their holdings every three months! Thus, we can see the ebbs and flows of their portfolio throughout the year -- buys, sells, and holds. Why ignore a potential gold mine of stock ideas?
Today's review
Today we'll focus on Edward Lampert. Mr. Lampert runs ESL Partners, based in Greenwich, Conn., which reported assets under management of $9.1 billion at the end of the third quarter. Unlike most hedge fund investors, Lampert is known for taking large positions and holding them for long periods. (Kinda like that Buffett guy!)
Lampert's unusual approach has led him into long-term holdings of AutoZone (NYSE: AZO), AutoNation (NYSE: AN), and Sears Holdings (Nasdaq: SHLD), each of which he's held for many years. In the case of Sears Holdings, Eddie has been chairman since merging Kmart with the old Sears Roebuck in 2005.
With that in mind, let's take a look at what Eddie Lampert was up to last quarter.
Top 10 Holdings
|
As of June 30, 2011 |
Shares Held (in millions) |
Value* (in millions) |
|---|---|---|
| Sears Holdings | 48.2 | $3,442 |
| AutoZone | 9.5 | $2,789 |
| AutoNation | 62.2 | $2,278 |
| Gap (NYSE: GPS) | 30.4 | $550 |
| Capital One Financial | 6.3 | $323 |
| CIT | 5.4 | $238 |
| Wells Fargo | 4.6 | $130 |
| Cisco | 7.5 | $118 |
| Seagate Technology | 7.2 | $116 |
| Genworth Financial | 10.9 | $112 |
Source: 13F-HR Filings for RBS Partners. *Based on stock price at filing date.
|
As of Sept. 30, 2011 |
Shares Held (in millions) |
Value* (in millions) |
|---|---|---|
| AutoZone | 8.9 | $2,849 |
| Sears Holdings | 48.2 | $2,771 |
| AutoNation | 61.8 | $2,027 |
| Gap | 36.3 | $589 |
| Capital One Financial | 5.9 | $235 |
| CIT | 5.8 | $175 |
| Cisco | 7.5 | $117 |
| Wells Fargo | 4.6 | $112 |
| Seagate Technology | 9.7 | $100 |
| Big Lots | 1.9 | $ 65 |
Source: 13F-HR Filings for RBS Partners. *Based on stock price at filing date.
Taking a closer look: Gap
One of Lampert's newer holdings that he continues to grow is Gap. Most Americans are well-versed in Gap's apparel: Since the late 1980s, Gap has defined the "Classic American Style" -- one now followed by retailers ranging from J.Crew to American Eagle (NYSE: AEO) and Abercrombie & Fitch (NYSE: ANF), who add their own twists.
However, Gap's stunning growth in both sales and market capitalization during the '90s came to a halt in the '00s. In part, this is due to simple financial gravity -- the idea that "trees don't grow to the sky." In part, one could say that Gap has not been the superb merchandiser it once was with Mickey Drexler at the helm (he's now the chief of private-equity owned J.Crew). While these explain the stagnation in sales growth, they don't suffice as reasons for Gap's shrinkage in stock market value.
As it turns out, Gap's stock was very high entering the '00s, and the pendulum has now swung in the other direction. Gap earned $877 million in the year ending Feb. 2001 on over 850 million shares outstanding, creating a stratospheric P/E multiple at its then-$45 share price.
With $1.2 billion in fiscal 2011 earnings and around 500 million shares left outstanding, Gap's current P/E is around 10, and it carries a mere 4 EV/EBITDA multiple. In addition, the company has been repurchasing shares at a lightning pace: From Sept. 2, 2010, to Aug. 30, 2011, the company reduced its shares outstanding by 17%!
Conclusion
Keep in mind that size is the enemy of returns. Successful investing brings the money manager more assets, and before you know it, the billions limit the universe of investable stocks. If you've got Lampert's $9 billion-plus under management, buying the kind of $100 million market-cap stock that I and the Motley Fool Special Ops team prefer doesn't move the needle on your returns.
But while smaller stocks are more likely to be mispriced, any size company can offer value and catalysts. Opportunistic value means just that: Go where the opportunity is. Gap is a perfect example. And given Eddie Lampert's track record, Gap's low valuation, and its rapid – red-hot! -- share buybacks, investors should think hard about giving Gap a spot in their portfolio.
Fool on!
