TAKING STOCK: That's the way the shares crumble

Dear Mr. Berko:

In early 2008, I bought 200 shares of Sears Holdings at $37 and so far have doubled my money. Last year, my broker recommended that I sell the stock when it rose above $120, but because I believed it would rise to $175 (I got greedy), I didn't sell. That broker has retired, and my new broker's recommendation is to hold the stock. He won't tell me to sell, because he thinks its book value of $86 a share is "rich with valuable, underpriced real estate," the values of which he believes "will come back with a vengeance in a year or two." He says Sears doesn't have high debt, that earnings will get better and the new CEO needs a chance to get his programs moving. All this is logical, but it doesn't feel right to me. Please give me your thoughts.

AC in Bloomsburg, Penn.

Dear AC:

Sears Holdings (SHLD-$73.61), the parent of Kmart and Sears Roebuck, has a legitimate $86.41 book value according to Standard and Poor's, Morningstar, Moody's and several major brokerages. About $66.50 of that $86.41 book value is represented by real estate, huge chunks of which are in areas where even pit bulls and werewolves are reluctant to tread between dusk and dawn.

Since the merger of these two big-box stores in mid-2005 (big-box stores are no longer consumer friendly), revenues have executed a slow-motion dive from $53 billion in 2006 to $42.5 billion in this year. And in that same time frame, SHLD's extraordinarily brilliant management continued to increase its number of stores from 3,427 to 4,102 today. Management reckons that increasing the number of stores will lower the sales volume per store, therefore requiring fewer employees, which reduces SHLD's labor costs. Good thinking. Only a board of directors composed of ex-members of Congress could figure that out.

Meanwhile SHLD's niggardly 0.5 percent net profit compared to Dollar Tree's 7.2 percent, Nordstrom's 6.9 percent, J.C. Penny's 2.5 percent or Target's 4.3 percent is an industry embarrassment. And Sears' enormously inflated price-to-earnings ratio of 35 is nearly triple that of its competitors.

A bright spot in Sears' picture is its new CEO, Lou "Sweet Louie" D'Ambrosio. According to the folks at Credit Suisse, Sweet Louie is "a positive addition to the chain." He is an impressive guy, highly focused, knows Sears' strengths and believes he can reconnect Sears to its customer base. Certainly one of Sears' biggest problems is attracting shoppers. Most locations are so cavernous and bereft of shoppers that Sears could probably house all the country's homeless without hurting store sales.

Credit Suisse is critical of Sears' declining market share, its weak merchandise presentation, its inconsistent apparel offering and its productivity problems. So Gary Balter, one of Credit Suisse's top-gun analysts, comments: "We are not sure there is a solution." And rather than issue a "Sell" opinion, Credit Suisse tells its clients that Sears will "underperform" the market. In other words, Credit Suisse doesn't have the guts to say "Sell."

The term "underperform" seems to mean that in an up market, Sears will not go up as much as the market, while in a down market, Sears may not fall as much as the market. Even though Credit Suisse's analysts have a 12-month target price of $50, they don't want clients to sell Sears. And while Argus, Reuters and J.P. Morgan also have 12-month price projections in the low $50, they don't want you to sell Sears, either, even though there's a potential 20-point downside.

"Sic friatur crustum dulce," which were Jonah's parting words to the whale. Sell your 200 shares, and as a wise trader once told me: "Profits speak louder than words."


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2011 Creators Syndicate Inc.

Published: Fri, Jul 15, 2011