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Just when I thought I was out...they pull me back in



November 30, 2012 – Comments (4) | RELATED TICKERS: SHLD , AIG

Like many value investors, I have been tempted by the siren's song of Sears and the Eddie Lampert story once or twice over the years.  I've never been tempted enough to put real money into SHLD, but I have played it here in CAPS once or twice.  Now I know that he seems like quite a Sears cheerleader, but the famous fund manager Bruce Berkowitz once again made a very compelling case for the languishing retailer in a great recent interview with Fortune Magazine.  He also provides a brief update on a stock that I do own, both here and in real-life AIG.  He was one of the first bulls to the party on that one.  

One interesting additional note, a whopping 74% of his fund's, Fairholme, assets are in 5 stocks.  Wow now that's conviction in your ideas.

Bruce Berkowitz: The return of a star fund manager 

"Lately you've begun talking about the real estate value of Sears, which accounts for 10% of your fund.

The value of Sears (SHLD) [which trades near $60] would be over $160 a share if the land on the books was fully valued. You can look back at recent transactions and ask a question: How can Sears close stores and generate hundreds of millions of dollars of cash? It gets at the inventory. The liquidation value of its inventory approaches its stock price. Forget the real estate.

You make Sears sound like a liquidation play, not a retail recovery.

The retail recovery is a potential upside. Regardless, you'll see gigantic cash flows from the closing of locations, the pulling-out of the cash from inventory, work in process, and distribution centers. They're not idiots when it comes to real estate. They understand that today's standalone store can be tomorrow's multi-use hotel/residential-retail center. I think Eddie Lampert will end up being one of a few unbelievable case studies on what it means to be a long-term investor..." 

"AIG's stock, which makes up 40% of your fund, has returned 50% this year. What does it need to do to deliver the 20% a year you think is possible? Will Hurricane Sandy claimsprevent that?

It's too soon to tell, but it's not critical. AIG (AIG) is priced for 10 Sandys. More broadly, the company needs to reduce expenses, which will naturally occur. There's been a huge amount of time and energy placed in dealing with the Federal Reserve and the U.S. Treasury, and building new information systems. So you'll start to see significant cost reductions over time.

They're also moving away from low-frequency, high-severity insurance, which, in my opinion, is picking up pennies in front of a steamroller. But I think Peter Hancock, who runs their property-and-casualty business, understands that the one-in-100-year storm happens every five years. "

I'd love to hear others' thoughts on Sears and AIG.  Thanks for reading everyone.  Have a great weekend!


4 Comments – Post Your Own

#1) On November 30, 2012 at 5:26 PM, constructive (99.97) wrote:

AIG looks like a good trade until it reaches fair value, but I'm not convinced that the business can earn long term above market returns like Geico, Aflac or Wells Fargo. Paraphrasing Buffett, you don't need an exit strategy if you buy a great business at a decent price, but you need one if you buy an decent business at a great price.

With that in mind I own shares of three insurers. Genworth (GNW) is lower quality and price, Symetra (SYA) is medium quality and price (similar to AIG), and of course Berkshire (BRK-B) is higher quality and price.

Hope you have a great weekend too.

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#2) On November 30, 2012 at 8:55 PM, JakilaTheHun (99.91) wrote:

SHLD has always interested me, but I can not come up with valuations for their real estate holdings anywhere near Berkowitz.  Of course, I don't have anywhere near the resources that Berkowitz and Lampert do --- I know some of these hedge funds and PE firms have entire operations that can pinpoint the valuations of these properties.  Whereas, the rest of us have to rely on public filings and the such, which is much more difficult.

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#3) On December 01, 2012 at 10:19 AM, TMFDeej (97.73) wrote:

Hey guys.  Thanks for the comments.  I always enjoy reading your thoughts.

 I'm no expert on insurance, but this does seem like a good time in the pricing cycle to buy most insurance companies, especially a beaten down one like AIG.  There's some relatively attractive AIG Preferred shares out there too.

Jakila, I completely know what You mean about Sears. Certainly very attractive but I just can't bring myself to do it it's been so poorly run for such a long time that well maybe that's the best to buy it.  Hey pretty cool I just used speech recognition on my iPad to write this ccomment.


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#4) On December 04, 2012 at 3:09 PM, BTShine (96.75) wrote:

It's better to be approximately right than precisely wrong.   Do a search for the price of retail real estate (mall and off-mall) and then apply that to the real estate Sears/Kmart controls.  Add a discount for uncertainty, and for the fact that some locations are leased.  

 You can then come up with an 'approximate' value for the real estate of Sears Holdings.  Whenever I've done this I've found the value to be much higher than the stock price.  


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