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