How Much Trouble Is “The Next Warren Buffett” In?

“… there is a light burning in this guy that doesn’t burn in many people.”

Earl G. Graves Jr., president of Black Enterprise Magazine, who knew Lampert when they were both students at Yale in the early ’80s 

In a cover story from November 2004 Business Week dubbed then 42 year old investment prodigy Eddie Lampert “The Next Warren Buffet” (Cover Image). 

Shortly after, the merger between Lampert-run Kmart and Sears was announced with Lampert to be Chairman of the combined enterprise (Press Release November 17, 2004). 

Ever since, Sears (SHLD) has been a huge story stock with a wide following among Lampert fans, including Mad Money’s Jim Cramer, who have called it “the next Berkshire Hathaway”.  The idea was that, like Buffett had done with textile mill Berkshire Hathaway, Lampert, who idolizes Buffett and pored over his writings as a young man, would use the cash flow from the retailers to fund his investments, ultimately building a Berkshire style investment empire.

The problem is that Kmart and Sears were, and continue to be, struggling, second rate retailers who are being badly beaten by the competition.  Same store sales have been falling off a cliff forever, including today’s announcement that they declined 3.5% in the 9 week holiday period ended January 5, 2008.  Also in today’s announcement is that 4th quarter earnings will be off about 50% from last year (Press Release).

For a while, investors ignored the reality of the decidedly mediocre retail businesses and focused on Lampert’s investment wizardy, bidding shares up about 90% from the time of the merger announcement until earlier this year. 

But since an ugly preannouncement in May (Press Release), investors appear to have woken up to the reality of Sears’ retail businesses and shares have shed more than 50% of their value and now trade below the $100 level they garnered at the time of the merger (SHLD 4 Year Chart).

At this point, the stock has become a battleground between bulls and bears. 

15% of outstanding shares are sold short and MarketWatch columnist Herb Greenberg named Lampert his Worst CEO for 2007.  Some sees shares continuing lower – along with the declining fundamentals at Kmart and Sears (see, for example, “The Softer Side of Sears: Oh, no!  Sears is still a retailer!”, Daniel Gross, Slate, 7/11/07). 

But there are many who are still believers in Lampert’s legendary investment ability, including Cramer (also see “Don’t Mess With Eddie Lampert”, Morgan Housel, The Motley Fool, 12/4/07).

Sears shares are trading at about 16 times this past years earnings and it doesn’t seem to have thrown off much cash in 2007.  With a continuing deterioration in their core business, a tough macro environment and superior competitors (Best Buy, Target, Walmart) I have to wonder how much trouble “the next Warren Buffett” might really be in.

Disclosure: Top Gun has no position in Sears (SHLD) shares.

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