Comments on Sears Holdings
The Fairholme Fund is my largest personal investment. Fairholme has been getting quite a bit of good press lately, and held up very well during the first half of the year. Their performance has suffered somewhat in the second half, although they are still well ahead of the average large blend fund.
Owning Fairholme effectively makes me an investor in Sears Holdings. In fact, Gurufocus reports that Fairholme added to its Sears investment - and my Sears investment - during the quarter ended 9/30/08.
When times were good, Eddie Lampert did wonders for the stock price. Now that times are bad, we have to ask, was he swimming naked?
Indeed, the weak retail environment has been taking a disproportionate toll on Sears. I don't shop there, but everyone I know who does says it's a dismal place. Lampert seems to be running the retailer with a financier's mindset. A recent WSJ article (now subscription only) contended that Sears capex was 1% of sales, where Wal Mart spent 5 times that.
I've heard Eddie say that if he couldn't get an appropriate return on his investment, then he wouldn't spend. Fair enough. However, as a retailer, you have to invest in your stores or you're not going to make sales. You'll send the business into a death spiral, which is what's happening to Sears. If Lampert can't get an adequate return out of investing in his own business, then perhaps he should not have become chairman. Perhaps he should not be running a retailer.
People have speculated before that Eddie is going to turn Sears into another Berkshire Hathaway. I'll believe that when I see it. Meanwhile, all I have to go on is his reported actions and his quotes in the press, and they all seem to indicate that he's trying (and failing) to run Sears as a retailer. His recent reorganization will enable the company to extract value from its still valuable brands like Craftsman. However, I just don't see Sears being worth all that much as a retailer. Sears and K-Mart are essentially dying brands. My guess is that Eddie will have to monetize the real estate at some point to create enough value to make the company attractive to investors.
Bruce Berkowitz, Fairholme's manager, has previously stated that he bets on the jockey, or the management team. This led him to invest heavily in Berkshire Hathaway (although he's now trimmed his position by quite a bit). Sears is another bet on the jockey. Indeed, Lampert's record as a hedge fund manager is excellent. However, now he's running a retailer into the ground. I question the validity of his record here.
In my personal investments, I bet first on the horse, or the company's economic moat. I would obviously prefer a great management team and a wide moat, and I see that combination with companies like Fastenal, Enterprise GP Holdings, US Bancorp, Compass Minerals and Carmax. However, I'll settle for just an average jockey and a great horse. In fact, I'd generally prefer that to an average horse with a great jockey.