Friday, July 24, 2015

Clearing Up Naive Investor Misunderstandings at Sears

July 24, 2015
Sears Holdings: How $3 Billion Turned Into a Negative

It isn’t really clear why the stock is in a huge downtrend other than possibly typical misunderstandings of the transaction and Sears in general.

Here is an example of a typical misunderstanding that everyone can relate to.

Let's say you have a friend who once had a great high paying job as a senior financial analyst. When the Great Recession hit, he lost his job and is now the head fry cook at a local fast food chain. He wanted to maintain his standard of living though, so he clearly had some cash flow problems.

Using the problem solving and negotiating skills of his last job, he decided to raise cash by selling his 2014 Lamborghini Veneno Roadster. You, being one of his friends, were amazed at how much money he got for it.

In an effort to continue maintaining his standard of living, he worked out an equally impressive deal leasing that car back from the current owner. It wouldn't be forever of course. He would just do it until he got fully back on his feet. You know, just until the financial services industry started hiring massive numbers of financial analysts again.

So, you are probably wondering how you can invest in his turnaround story, now that the Fed has permanently put an end to recessions. Well, that's not a problem. He's just incorporated himself, once again using the skills he gathered at his last job, and is now accepting cash from new investors.

This also explains why your voice mail is full. He's being very persistent and won't seem to take no for an answer. Seems to think that a true friend would not allow another friend to miss out on his once in a lifetime opportunity. And that restraining order? Doesn't seem to stop your doorbell from ringing at 3am. But what else can you really do? He's a true friend who is only looking to help you now that he's down on his luck. It's probably all just a typical misunderstanding.

Of course, the biggest direct issues for shareholders is that the company traded the large cash position for an ongoing lease payment. The higher expenses have a direct impact on earnings that were already extremely negative.

You think? I have no desire to be a Sears investor, even at these "low" prices. Could be wrong to think this way of course, but the long-term risk is way too much for me. And further, I wouldn't want to be a hypocrite. One of my predictions for 2015 was that department store sales for the industry as a whole would be lower in 2015 than they were in 2014. Unfortunately, no pleasant surprises on that so far. Way to go Amazon, I guess.