Trading the Sears end game

Articles have been speculating about the possible bankruptcy of Sears Holding, the major retail chain in the United States and Canada. At $40 a share, that would be a tidy profit for the short community. But because of the unique situation of Sears Holding as a stock position for billionaire Eddie Lampert and his hedge fund, ESL Investments, it is more likely that the retailer will be taken private than file for bankruptcy.

Sears Holding was formed from Eddie Lampert combining the bankrupt K-Mart with Sears back in 2005. Observers speculated that Lampert was hoping to develop Sears Holding into an investment vehicle like Berkshire Hathaway is for Warren Buffett, who Lampert has attempted to follow. For Buffett, Berkshire Hathaway throws off free cash flow that allows him to acquire new investments. As a result, the original Berkshire Hathaway, a textile plant, is a non-factor in the Buffett investment portfolio.

Sears Holdings was looked at by many as doing the same for Lampert and ESL Holdings. Assets such as Land’s End could be sold off and the vast real estate holdings monetized, which would produce billions to buy other companies. The cash flow would allow for other investments, too. The borrowing power of Sears Holding would also allow for Lampert to expand beyond the original stake, so that the core Sears Holding became a lesser a player in the overall investment paradigm.

For Lampert, though, it has been the opposite with Sears Holding. Sears Holdings provides a major share of the investments of his and has been the largest position of ESL Investments in recent 13F filings. Supporting its share price has required billions in stock buybacks that would have been better spent investing in a plain vanilla index fund that tracks the Standard & Poor’s 500, as shown by the chart below.

Because of this position, it is doubtful if Lampert would let Sears Holding go bankrupt. It certainly has not performed as a trading or investment vehicle that has financed the purchase of other assets with excess capital. There have been no other companies acquired because of the cash flow generated by Sears Holding, in fact.

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