Sunday, December 7, 2008

Sears' Real Estate

The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment.
– Benjamin Graham, The Intelligent Investor

Sears Holdings is a quintessential example when it comes to examining a market-based perspective versus an asset-based perspective. Consider Sears' 257 million square feet of real estate. A look at market rates on this space, put to its best use, implies an intrinsic value upwards of $40 billion for Sears' real estate alone (or a conservative average of roughly $150 per square foot), without taking the value of Sears' other assets into account. The stock market currently values the entire company at $5.75 billion.

The market-based view of the world says that Sears stock is going to do poorly over the next few quarters because of macroeconomic concerns. Almost all the economic and financial news is bad, and the American consumer is reeling.

However, the large short interest in Sears strikes me as attempting to pick up nickels in front of a bulldozer; the real estate value is a massive imbalance that is incredibly clear-cut, paired with an aggressive stock buyback plan. Yet anyone who is market-fixated cannot see past the near-term outlook and price fluctuations. By focusing on the market instead of the assets, these investors are turning others' mistakes into their own.

It sounds simple, but investors cannot seem to act on the "buy low, sell high" principle when it appears. Many do exactly the opposite. And in this respect, the market works as Warren Buffett has described it: as a wealth-transfer machine.

If one follows where Sears stock has been going, it is being sold by bloodied institutions and blind investors who've read the news but not the financial statements. And it is being bought hand-over-fist by Sears' chairman Eddie Lampert and the Fairholme Fund's Bruce Berkowitz, men who've specialized in compounding money at rarefied rates.

The beauty of capitalism is at work. It is a process where assets are transferred from the hands of incompetents to those who make shrewd decisions.

Creative Commons License
This work by Nicholas E. Radice is licensed under a Creative Commons Attribution-No Derivative Works 3.0 United States License.