Sears (SHLD): Big Stock Short Opportunity

(Originally Published 4.27.2017)

Sears Fundamentals

We love high probabilities, and Sears is no different. Markets always rotate through the latest boom and bust; the past couple of years have mainly been energy due to oil prices. Now, it’s retail’s turn, and if you want to ride the wave of negativity, then Sears is the company to do it.
To be blunt, the fundamentals of this company absolutely suck. Take one look at a balance sheet or income statement and it’ll make anyone who owns Sears shares want to puke.  “Oh, but Sears’ CEO is dumping money into the company to keep it going”…we’ll get to that later my friends…
Want to know if Sears is going out of business in the long run?  Ask yourself this simple question: how many of your friends will tell you they shop there?  Seriously.  I challenge you to ask about 30-50 of your friends and keep a tally in your head.  Now compare that to the same question but replace it with Amazon (AMZN) or Wal-Mart (WMT) for most retail, and Best Buy (BBY) for appliances/electronics. It’s probably a huge difference in percentage isn’t it.  This is one of the simple techniques value investors such a Buffett use in determining a company’s long term value.  

Sears is a Retail Department Store and Not a Real Estate Investment

One bastardized quote I took from the “Big Short” was the minute terms are used or actions are taken that makes you feel bored, misunderstood, or downright stupid, it’s because it’s supposed to.  In this case, the CEO of Sears is shuffling money around during major loss periods, and in the words of Game of Thrones, it wreaks.
Let’s go back to Sears CEO for a minute though, because this is the argument many bulls are making in the case of SHLD as a cheap stock to “buy buy buy”.  Eddie Lampert recently shot a ~$500M loan from his real estate invest trust (REIT).  Subsequently, he acquired a sizable amount of shares around the $8 price range. But pump the brakes for a second.  If Eddie Lampert owns the REIT that subsequently owns debt from Sears, and is gaining interest on that debt, who comes out like a gangbuster if Sears becomes as we say in the military: FUBAR? Eddie Lampert. Not you petty common stock holders.
With an additional acquisition from Fairholme Capital Management, this might also seem like positive news.  Although this might seem like majority stakeholders/insiders buying when the time is ripe to drive the price up, don’t be fooled. First look at Fairholme Capital’s funds and their performance on Morningstar. Although the growth since the fund’s inception might seem relatively attractive, according to Kiplinger columnist Steven Goldberg, the average annualized return was only 4.4% for most investors in the fund and it’s 75% more volatile than the S&P 500. (You can read his article here). The multiple funds buying/selling of equities have been extremely poorly timed, and is poised to get burned in the event of a bear market (ehem, Sears is in a bear market).  At the end of the tety, not all institutional investments are created equal, and Fairholme is no different.
So how am I playing this sinking ship.  Well, shorting is always too risky, and I rarely if ever do just that. Instead, Sears will not be going under tomorrow, but likely will fluctuate as news and rumors drive the stock up until earnings disappoints it down. So, this is best for a call credit spread.

Looking at the chart, if you missed the last week’s signal, then have no fear. As of now, if you were to sell the December $11/12 call spread, you have a 70% chance of making ~30% Return on Investment/Risk (ROI/ROR) for 8 months of waiting. That’s pretty good odds and not a bad return for less than a year’s work.
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