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Our largest issuer position, at nearly 50% of assets, is in AIG common and warrants. Our second largest, at 15%, is in Bank of america common stock. Both are designated Global Systemically Important Financial Institutions. In other words, they are too important to fail, have significant value beyond their fortress-like balance sheets, and are capable of distributing healthy earnings to owners through dividends and/or buybacks of common stock. Yet, both trade at discounts to book value.
Headlines shout of Sears’ disastrous 2013 loss of $12 per share. A longer history shows that since the merger of Sears with Kmart, about 9 years ago, sears has distributed over $66 of cash per share via buybacks and spin-offs and has paid down $27 per share of a pension liability that is no different, in our view, from debt. Fairholme research estimates that the fair value of sears’ net assets exceeds $150 per share. If our research is accurate, we expect sears’ market price of $38 to increase to this value over time.
Two of our best performers during the period were Fannie Mae and Freddie Mac. Both are absolutely essential for uniquely-american, affordable mortgages. If you disagree, try getting a 30-year, sub-5% mortgage outside of the United States. In 2008, both companies agreed to U.S. conservatorship and extraordinarily harsh terms and conditions during a time of global crisis. The plan worked. Fannie and Freddie saved the day, repaid nearly every penny of cash received from the u.s. Treasury, and can look forward to resuming a prosperous future based just on the aging of assets held. However, many believe Fannie and Freddie will be victims of a government-sponsored expropriation that brings our country closer to a future conceived by George Orwell in his novel, 1984. We disagree.
On the macroeconomic front, u.s. fiscal responsibility and u.s. energy independence are on the horizon! economic progress will eventually lift interest rates, which will depress asset valuations. However, our banks and insurers should more than counter this weight with a lifting of margins between earning assets and paying liabilities. Overall - a net positive.The Fund’s portfolio prices remain a third below our growing estimates of intrinsic value... If history is any guide, expect these two measures to converge one day. For now, we believe, the difference between them to be a large margin of safety.
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Comments
And I'm Santa Claus. Will the US ever act fiscally responsible? Ho Ho No.
"they are too important to fail"
Oy.
"Sears spin-offs"
Hopefully those that got the spin-off for Orchard Supply Company (which went to zero) sold it. And hopefully those who got the spin-off of Sears Hometown and Outlet (-44% in the last year) sold it. If those are examples of the kind of assets that Sears has to spin-off, maybe they can spin-off K-Mart next.
I'm waiting for the day that it becomes apparent that financial engineering will not make 1+1 = 4 at Sears. I don't short stocks, but Sears is one instance where I wish I would have when I questioned on fund alarm who in their right mind would own Sears when it was North of $100.
"Sears buybacks"
Um, at what price did those occur and how much?
"Headlines shout of Sears’ disastrous 2013 loss of $12 per share"
Uh, yeah - they should. So, we should ignore that and focus on the company's mediocrity (and that's being rather generous) in the recent past rather than the current awfulness?
"Fairholme research estimates that the fair value of sears’ net assets exceeds $150 per share"
No. Bruce Berkowitz is a brilliant investor, but I'm saying $150 a share for the Sears assets is absolutely ludicrous and these assets are becoming less compelling as the company becomes more irrelevant (and loses more money) by the day. Maybe the Sears insiders who are selling (Lampert seems to be the only one buying and even he had to sell recently due to redemptions in his hedge fund) should be told of this plan to deliver value.
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What I'm most curious about is the Imperial Metals holding. I do think the Fannie/Freddie preferred situation is interesting, although the government is going to do what it's going to do.
I'm counting on AIG and BAC to cover the Sears losses. Hope the funds sold back some of their Sears stock in the $66 cash/share buy back" - one of the weaker arguments I've seen anyone make. I'm hoping St Joe comes through before I enter my dotage (further). I now regard FAIRX and FAAFX as part of my speculative holdings (at least they are still positive from purchase).
Good luck......Morningstar gives Sears (SHLD) a Fair Value Estimate of $10.
Will be interesting to see who turns out to be right.
The inventory? I don't assign much value to the inventory. If it's not selling at Sears, I don't imagine that Target and Kohl's are going to be fighting over the scraps.
How can you be the least bit excited about inventory held by a chain that has been run in a completely neglectful manner for the last several years and that has been losing enormous amounts of money?
I mean, REALLY:
Berkowitz said in an interview that he believed the inventory was worth the price of the stock. That interview was in September 2012. The price was approximately $52.55 at the time. The inventory is worth anywhere near that? In what fantasy world?
The brands? They have lost value as Sears has become more irrelevant. There is value there but I would not be cheering about it.
The real estate and the reinsurance companies are the key. There is definite value to the real estate (although I don't think to the degree that some believe) but we're on one side of the mountain and the value is on the other. Who are we counting on to get us to the other side of the mountain? The person who has destroyed so much value since taking over the company? Oh, ok.
I don't see enough retail demand to absorb all of that real estate - I don't see it by far, actually. It's no wonder that some K-Mart/Sears stores have been turned into data centers (although I would love to see how a 60's-era K-Mart can be turned into a satisfactory data center. Blue Light special on server space?)
Some of the "prime" real estate has already been sold off. From Fairholme's presentation: "Limited construction has constrained new supply of retail real estate." There is little need for new retail real estate, there's too much as it is. (again, see video clip above.) Companies are looking to downsize their stores. We had the whole discussion here the other day about the future of retail and issues like online/mobile shopping and other changes.
There is still prime real estate owned/leased/whatever by Sears, but I think there is unquestionably a lot of not prime or subprime space that is going to be sitting vacant for a while if there is not Sears or K-Mart there.
Lets be honest about the current retail operations: it is not about turning around the company. To quote Berkowitz: " “Sears does just enough, so they're not breaking the terms of their very long lease.” (We're not going to improve the business, we're going to neglect it for years and then wonder why it's losing money and relevance by the day? Huh, ok.)
(http://www.investmentnews.com/article/20120918/BLOG06/120919939)
Eventually, there's another recession. Online shopping/mobile continues to increase. Sears continues to lose money. If this is a liquidation, it's not as if it has all the time in the world to occur.
So, yeah. I absolutely do think that there is more value in Sears than the current price. Nowhere near $150, but more than current price. That said, I think that value is on the other side of an investment mountain. I do not think that getting there is a guarantee, nor do I have confidence in the person who is the one trying to get it from point A to point B.
There could be a lot of value in the company. If the one running it runs it into the ground, others are going to be able to pick off that value at FAR less than the wildly optimistic levels some have it at.
St Joe has about 40% of the float short and Sears about 60% of the float short. That's an enormous amount of bets piling on against both companies. That can't be all retail investors.
The other thing that concerned me from the Berkowitz interview re Sears was this: “[Lampert] is going to try to make a go of it and if he doesn't make a go of it, he's going to slowly sell the real estate. So, I just don't see how we lose there.”
You don't, Bruce? There's no way that the investment could not go as planned?
And the attitude that Lampert can take a spin and see if he can't do any worse than he has at running a company that involves THAT many people and if it still doesn't work out, we'll just sell it off.... That has been covered well by hedge fund manger John Hempton's discussion of Sears (Hempton: "My view: owning Sears as a property play is a demonstration of the arrogance and breathtaking naivete of much that passes on Wall Street"), as well as the by the people in the comments section of his website.
http://brontecapital.blogspot.com/2011/12/sears-holdings-liquidation-sale.html
oops...not as bad as this spelling and situation:
Can-This-Patatoe-Get-More-Fans-Then-Justin-Beiber?
http://seekingalpha.com/article/1842602-tracking-bruce-berkowitzs-fairholme-portfolio-q3-2013-update
"Last two quarters saw a combined stake increase of ~10% at prices between $40 and $60. The pattern continued this quarter with a marginal stake increase at prices between $39.34 and $62."
Not a flame; just trying to follow your thinking on this.
I respect his record and think he's an excellent investor. However, just because I think he's a tremendous investor doesn't mean I can't strongly disagree on a few things, Sears being the primary one. I actually think Sears is undervalued, but again, I think there's a road between here-and-value that is not without potential problems. I also think $150 is wildly optimistic. Additionally, hedge fund Bronte Capital's article on the whole thing summarizes some of my broader views on the Sears situation, and I agree with a fair amount of the detailed comments under the article.
But that's just me.
Regards,
Ted
Billy Joel: Don't Ask Me Why:
In any case, there have been a number of these moves in Sears on no news all the way down.
I don't think Sears is a zero and think the assets are worth more than the current price (and that's if everything goes smoothly after it hasn't for years!) but again, I think the optimistic case is absurdly optimistic. There is a mountain between here and value being realized.
I wouldn't go anywhere near it - it's the kind of thing that could do well or if it doesn't, in the absolute worst case I question who will pick over the value that is in the assets (there is apparently some sort of bizarre preferred that is leftover from the Sears Roebuck days?) The fundamentals aren't any good, so it becomes entirely whether you believe value in assets can be realized and what demand there will be for those assets and how long that will actually take.
To some degree, there's also the view that you take what you can get, and nothing is a sure thing in investing. Fairholme owned Sears above $100. It now owns an increasing amount with the stock in the mid-30's. You didn't have positive fundamentals because you have management who doesn't/didn't really act like they care much beyond what they believe to be the value in the real estate. So, what was going to keep the stock above $100? What opportunity costs are lost from sitting around waiting for a stock that has gone from $100 to $35 in the hopes that one day it may get back to $150, which is by no means guaranteed?
Opportunity cost is a good question for the whole thing. The idea that someone who has run a classic American brand into the ground and is losing billions should be given the opportunity to try to turn the business around after not investing in it for ages is completely bizarro world to me.
Beyond that, it becomes a question of honesty and whether a turnaround is even the intention. If you're going to sell the thing, sell it. Stretching it out over years as the business continues to lose a fortune isn't doing the value of the remaining assets any favors.
Was this always a "real estate play" from the beginning? Why wasn't he selling off assets from the outset? Was the intent to turn the business around? If so, then why was there so little effort in doing so - bringing in tech company CEOs with no retail experience? Was this supposed to be Lampert's Berkshire? Maybe, but Sears wasn't the right base to start with.
Are there great assets? Sure. I think there are some lousy ones, too. I think the reinsurance company is interesting and some of the real estate is interesting. Brands are interesting but not nearly as much as they once were. The inventory - I really disagree from the standpoint of, what's the value of inventory from a business that hasn't been run well? I mean, that's the one thing that really gets me: how can you be excited about the value of inventory in a retailer that is losing tons of money?
If Lampert is going to do some sort of thing to take it private, do it. I don't think he will.
What's the plan? I think that's really the question. Secondly, I don't think this process can be just be extended for years and years.
Is there value here? Yeah, but what has been done to the company - both a large company and a great American company (was, at least) is pretty dismaying.
Still works as a good summary:
http://finance.fortune.cnn.com/2011/05/12/eddie-lampert-dementor/
Regards,
Ted
Harry Potter: Soul Sucking Creatures