Investing Ideas

First lets get a few things out of the way.

1. Sears Holdings is a Holding Company and not a Retailer. The current holdings just happen to be 3 retailers.

2. Same store sales. There is no point in increasing sales if it leads to decreasing profits. Would you rather sell 10 items of clothing with $10 profit per item or would you sell 15 items of clothing with $6 profit per item? The fewer sales give a $100 profit v/s $90 profit from the higher sales. An increase in sales does not mean increase in profits and what counts is PROFITS.

Now that we have that out of the way lets value Sears Holdings

Sears Valuation

Sears Canada - Sears owns 70% of Sears Canada which is worth $2 Billion
Brands - DieHard, Kenmore,Craftsman could be sold in a Bond valued at $1.8 billion.
Lands End - Sears paid $1.9 Billion for Lands End in 2002
Home services
Real Estate - Sears is a 115 year old company. Some of its real estate was purchased before Walmart even existed. The real estate is carried on their books at the price they paid for it 10, 20 and possibly in some cases 50 or more years ago. It currently owns about 110 Million square feet of real estate. A lot of this real estate is in prime locations around the US.

• Sears Mall stores 518 with Avg Sqft of 134,000
• Sears Essentials/Grand 20 with Avg Sqft of 113,000
• Kmart Discount 139 with Avg Sqft of 93,000
• Kmart Supercentres 34 with Avg Sqft of 165,000
• Sears HQ - 2 Million Sqft + 200 Acres of land
• Warehouse and Distribution Centres - 15 Million Sqft

Total = 107.2 Million Sqft * 160 (S&P/GRA Commercial Real Estate Indices) = 17.1 Billion

This gives Sears Holdings a minimum Valuation of 22.8 Billion the company is selling for 14 Billion.
Liquidation Value of SHLD in my opinion is $164+/share.

Additional value that could not be calculated due to lack of sufficient data

• Sears Speciality - Unknown size of stores so counted as zero
• Sears also has extremely favorable leases on a lot of its other stores. They control about 150Million sqft of leased properties usually at below market rates. It could sell its leases or sublease these stores. But detailed data on the lease agreements is unavailable so this has also been counted as zero.
• Valuation for HomeServices and the actual Sears business is also counted as zero

Who else is investing in Sears?
Eddie Lampert - ESL investments
Bruce Berkowitz - Fairholme
Bill Ackman - Pershing Square
Bill Miller - Legg Mason Value

Full Disclosure : I own shares of Sears Holdings and am planning to buy more.

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Eddie Lampert has 3.5 billion in Sears Holdings. The merger between Sears and Kmart has gone well. Remember SHLD is not a retailer. SHLD is a holding company that happens to currently own 2 retailers. One thing i like about SHLD is Eddie Lampert is focussed on profitability and not on same store sales growth like most dumb retailers. Yes i know its the industry metric, I dont care. I want growth in profits and thats what Eddie delivers.

Here is a quote from the Sears Holdings message from the Chairman which hints at SHLD becoming a new Berkshire
“My goal is to see Sears Holdings become a great company whose greatness is sustainable for generations to come.”

Similarities between Eddie Lampert and Buffett.
Both started investing at an early age, have great long term records. Started a partnership/Investment Management companies at a young age with great long term returns. Both have virtually all of their net worth in these companies. Both have recieved special permission to delay filing their stock purchases. Both care about long term value and profitability.

What follows is pure conjecture. DO NOT MAKE ANY INVESTMENT DECISIONS BASED ON WHAT I PULL OUT OF MY HAT.

The long term future for SHLD.
Eddie Lampert will give away shares in SHLD to current ESL Management Partners.
SHLD becomes Eddie Lamperts version of Berkshire Hathaway.

SHLD in the near future
Rumors have been floating around that Eddie Lampert is prowling around for takeover targets. I don’t believe that the rumors about a Home Depot takeover have any substance. Id really like to see Eddie Lampert buy an insurance company like Progressive to manage its float. My candidate for companies that Eddie Lampert can takeover and turnaround OR companies with good Real Estate value which he can unlock are

• Gap Stores
• Radio Shack
• Pier 1 Imports
• Pep Boys
• Six Flags

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Every investor wishes he had bought Berkshire Hathaway shares 25 years ago. If you had $10,000 invested with Warren Buffett in 1982 the shares would be worth $1,280,000 in 2006. Berkshire Hathaway shares are undervalued at the moment and will have consistent and above average growth for years to come, but the law of large numbers dictates that the company is too big. You cant get the same 25-30% annual returns from Berkshire Hathaway anymore. We missed out on Berkshire Hathaway but we could look for companies that may turn out to be “The Next Berkshire Hathaway”.

What to look for in the search for the next Berkshire or Buffet

• Company is run by a Brilliant money manager(s)
• It follows value oriented investing
• The investments are diversified across industries so a downturn wont affect the business.
• Insurance backed so the company can use float generated with positive underwriting to create wealth. Free money is always good.
• High levels of Management ownership, which orients management goals with those of the shareholders
• Focus on long term growth of Shareholder value and not on keeping the dumb anylasts on wall street happy every quarter.
  

It will be nearly impossible to find a perfect match but we can look for companies that match 2 or more criteria.

1. Sears Holdings led by Eddie Lampert (SHLD).
Eddie Lampert started ESL investments in 1988 with 28 million. ESL has averaged 28% a year for the last 18 years. Eddie Lampert is one of the best money managers in the world. Recently he took a bankrupt K-mart and turned it into a cash cow. He merged k-mart with sears to form sears holdings. The stock has been on a tear since Kmart came out of bankruptcy, it opened for trading at $16 in May 2003 and now trades at $160. Eddie searches for companies that are seriously undervalued, he also sticks to companies whose industries he understands. The board has given Lampert the freedom to invest the profits from sears holdings any way he sees fit. Just as Buffett did with Berkshire Hathaway in the 60s. If any person will take over from Buffett as the greatest money manager of the current generation it looks to be Eddie lampert, and the vehicle through which he will reach there is Sears Holdings.

• Brilliant money manager(s) - Yes
• Value oriented - Yes
• Diversified - Not yet but board has given Eddie Lampert the flexibility to do so.
• Insurance backed - No
• Management ownership - Yes
• Long term growth - Yes

2. Brookfield Asset Management (BAM).
A canadian asset management company which focuses on industries that need lots of capital such as real estate, natural resources, energy and financial service. Assets include 70 office properties, 120 power-generating plants, thousands of acres of timber and a property development operation under the Brookfield brand name. The stock has moved from $8 to $50 in 5 years thanks to the brilliant investments its management has made.

• Brilliant money manager(s) - Yes but not in same league as Buffett.
• Value oriented - Yes
• Diversified - Yes
• Insurance backed - No - Brookfield uses low cost debt which is the next best thing to insurance.
• Management ownership - Yes
• Long term growth - Yes

3. Leucadia National Corp led by Ian Cumming (LUK).
Leucadia is an investment company run by two brilliant money managers Ian Cumming and Joseph Steinberg. The company invests in anything that can make the shareholders money. Their preferred investments are generally turnaround plays. Leucadia will buy large stakes in a distressed company. They revive the company, improve performance and then sell it off at a nice profit. The company is currently diversified into telecom, manufacturing, healthcare, banking, real estate and wineries.

• Brilliant money manager(s) - Yes
• Value oriented - Yes but riskier than Berkshire as Ian cumming seems to go for higher risk companies
• Diversified - Somewhat. Cumming occasionally likes to make extremely big investment bets.
• Insurance backed - No
• Management ownership - Yes
• Long term growth - Yes

4. Markel (MKL)
Markel is an insurance holding company. The company is a mini Berkshire any way you look at it. Extremely steady and consistent growth. Like Berkshire the company has never declared a split and the shares have risen from their 1986 IPO price of $8.33 to nearly $400 in 2006. The company holds diversified investments in a large number of stocks. The top 10 current holdings are Berkshire Hathaway, Carmax, Diageo, Fairfax Financial Holdings, Anheuser-Busch, General Electric, White Moutains Insurance, Citigroup, Exel Ltd, Brookfield Asset Management. Its funny how they seem to like Berkshire and other companies that look like Berkshire.

• Brilliant money manager(s) - Yes but not in the same league as Buffett
• Value oriented - Yes
• Diversified - Yes.
• Insurance backed - Yes
• Management ownership - Yes
• Long term growth - Yes

5. White Mountains Insurance (WTM).
This company has Buffetts blessings. White Mountains is 16% owned by Berkshire Hathaway. The way the company operates it seems to be another mini Berkshire. The operating principles, view of the management and their operating principles are an exact match with Berkshire.

Operating Principles - White Mountains cares most about the following.

• Underwriting Comes First
• Maintain a Disciplined Balance Sheet
• Invest for Total Return
• Think Like Owners

Other Excerpts - “Intellectually we really don’t care much about leaving our capital lying fallow for years at a time. Better to leave it fallow and to wait for the occasional high-return opportunity. Frankly, sometimes shareholders would be better off if we just all went to play golf.”

“We also admire Benjamin Graham who said: “In the short run the market is a voting machine; in the long run it is a weighing machine.”

• Brilliant money manager(s) - Yes but not in the same league as Buffett
• Value oriented - Yes
• Diversified - Yes
• Insurance backed - Yes
• Management ownership - Yes
• Focus on long term growth - Yes

6. Interactive Corp led by Barry Diller - A Futuristic Berkshire Hathaway
Barry Diller (the CEO of IACI) says the comparison is “undeserved at present but not my hopes and dreams”. He also says that the web will help IACI fit its pieces together in a manner that Berkshire’s parts from Insurers to Manufacturing, just cant. IACI has sales that will reach 7 bilion this year and a ton of cash but the company trades at just 8.5 billion. The company is spread across a lot on industries including Retailing which includes Home Shopping network; Ticketing with Ticketmaster; Real Estate with Lending Tree, RealEstate.com and others, Online search includes Ask.com, Excite, etc..

I know IACI is a far stretch but the company is undervalued, has leading sites in their business segments a great CEO.

• Brilliant money manager(s) - Barry diller is an ok money manager but hes a brilliant CEO
• Value oriented - If theres such a thing as a value based investment on the internet
• Diversified - Yes
• Insurance backed - No
• Management ownership - Yes
• Focus on long term growth - Yes

Conflicts : I own shares of Berkshire hathaway and Interactive Corp.

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A great man once said “If you dont know money, know your money manager”.

If you think you, your money manager or your mutual fund can beat the market youre probably wrong. Sixty five percent of mutual funds wont beat the S&P 500 this year. Most of the ones that do beat it will fall short next year. Why invest in a mutual fund that cant beat the market? You can easily invest in an index fund.
So you still want to beat the market? If you cant beat the market find someone who can. The last thing you want is to be invested in a high flying fund just as its about to dive. You need a money manager who can beat it consistently and has proven it over long periods of time. There are other money managers that i consider superinvestors like George Soros and Bruce Sherman but it is not possible for the average investor to invest with them so they have been excluded. I must mention Masters’ Select Value a mutual fund that is a favourite of mine. Three of its Four money managers Bill Miller, Bill Nygren and Mason Hawkins are in my favourites list. Its a great way to get exposure to multiple superinvestors in 1 mutual fund.

Take a look at my favourite money managers. Most of these superinvestors have beaten the S&P over long periods of time (10 years or more).
Individual Stocks
Warren Buffet: Berkshire Hathaway (BRK.A, BRK.B)
Eddie Lampert: Sears Holdings
My personal preference here is Berkshire Hathaway. It is better than Sears holdings in virtually any comparison.

The 3 dollar Bills
Bill Gross: Pimco Bond Funds (Too many funds to name)
Bill Nygren: Oakmark Select
Bill Miller: Legg Mason
I find it hilarious that my 3 favourite mutual fund managers are all named Bill.

Additional US Funds
William Danoff: Fidelity Contrafund
Joel C. Tillinghast: Fidelity Low Priced Stock
Harry R. Hagey: Dodge and Cox
Ken Heebner: CGM Focus/CGM Realty
Mason Hawking: Longleaf Partners

International funds
Charles de Vaulx: First Eagle Global
Riad Younes: Julius Baer International

There are too many great mutual fund managers and i wanted to keep my list small. I feel that some names need to be mentioned even if they are did not make my favourites list. Here are a few more brilliant managers and management teams

Richie Freeman: LeggMason Partners Aggressive Growth
Christopher Davis: Davis New York Venture Fund
John Calamos: Calamos Growth Fund
Wally Wietz: Wietz Partners Value Fund
Jeffrey Bruce: Bruce Fund
Oakmark International
Dodge and Cox International
Matthews Pacific Tiger

Conflicts : I have investments in Berkshire Hathaway, Fidelity Contrafund and Fidelity Low Priced Stock

Confession: I am the great man who said “If you dont know money, know your money manager”.

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