Wednesday, December 5, 2007

Has Lampert "Lost It"? Did Buffett?

With all the bashing of Sears Holdings (SHLD) Eddie Lampert recently, I was reminded by a reader of an article from Barron's in 1999 about the demise of Berkshire Hathaway's (BRK.A) Warren Buffett.

The whole article can be found here:

The lead sentence goes "After more than 30 years of unrivaled investment success, Warren Buffett may be losing his magic touch."

It then continues,
"Shares in Buffett's Berkshire Hathaway are set to experience their first annual decline since 1990 and their second-worst year of performance, relative to the Standard & Poor's 500 Index, since Buffett took control of what had been a struggling New England textile maker in 1965.

At around $54,000 a share, Berkshire's Class A stock is off 23% in 1999, against an 18% return for the S&P 500 (including dividends). Berkshire has been hurt this year by weak operating results at its core insurance operations and by a rare annual drop in the company's famed investment portfolio, which includes such stocks as Coca-Cola, Gillette and American Express .

Warren Buffett's distaste for technology has soured performance.

But there's more to Berkshire's weak showing than just the operating and investment performance. To be blunt, Buffett, who turns 70 in 2000, is viewed by an increasing number of investors as too conservative, even passe. Buffett, Berkshire's chairman and chief executive, may be the world's greatest investor, but he hasn't anticipated or capitalized on the boom in technology stocks in the past few years."

Now, hindsight always being 20/20, in retrospect this article is just foolish and Buffett was indeed proven correct as shares have almost tripled since then. Great long term investors do not "lose it" overnight, they just have a bad year. Now, here is the important part. The bad year is not necessarily because they made bad investments, it is because the market during that year went against those investment. The two are not directly related.

In fact, for investors like Buffett and Lampert, the two must be at times indirectly related. Unless they are, there can be no "value investing" as all securities at all times are accurately valued.

Let's not forget that even with Sears' recent slide, it is still up over 100% since Lampert combined the companies 2 1/2 years ago. Sears as a retailer is not "dead" as folks like to say. The retail environment has deteriorated dramatically the last year with virtually all retailers save Target (TGT) and Wal-Mart (WMT) suffering dramatic declines.

Since Sears is the nations #1 appliance seller (over 25% market share and 40% of revenues), the housing situation has hurt it more so that the other retailers (seen Home Depot's (HD) or Lowes (LOW) results lately?). These are high price, high margin items and this is the principle reason for the earnings situation. When housing turns around in 2008, Sears EPS will jump dramatically as at the rate Lampert is buying shares, there ought to be almost 20% less of them on the market by then.

Sears is not "dead". How can the #1 appliance seller be a dead retailer? Can it get much better? Sure. Is putting Lands End "store in a store" concept a winner? Yes. But let's not forget, there are 2600 locations and currently just over 200 have the concept. That is not going to turn a $53 billion operation around in a quarter. It takes time to retrofit locations and order merchandise to stock them. On this scale that process takes a year, not months. The expansion of the concept was announced in March and already the number of locations has already more than doubled.

Is Lampert on the right track? Yes he is. Lands End results have been setting record year after year. People love the stuff.

Sears is being hit on both ends with appliance sales suffering and retail clothing suffering to. Both segments of retail are being hit and with Sears largely into both, their hit is worse. Now, the same can be said of the turnaround in both, when the resume, Sears gets a double boost.

Lampert is thinking like an owner of a company, not a short term investor. That is a god thing for those of us who like to think the same way,

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