After Sears Holdings stock went down in early 2017, two insiders last week started a massive buying of shares that lift up the company to the top. However, it is just a well-played stratagem that can trick stock traders.
Since bottoming out at $7.60 two weeks ago, Sears Holdings shares are up nearly 50 per cent in the past six days, or 25 per cent this year. This has sent them quickly to their new heights of 2017. But what caused these quick changes?
The recent prosperity of Sears stock was provoked by a flood of insider buying by Sears CEO Eddie Lampert and board member Bruce Berkowitz. Two of the company’s biggest fans were pretty busy buying shares all last week – and that has boosted investors’ hopes that the company will not collapse after all.
However, this is not suggesting that Sears suddenly will become a successful company and could compete with Amazon, Best Buy or Walmart. But Lampert does have a plan. This insider buying is more likely an attempt by Lampert and Berkowitz to support their extensive financial interests.
CEO Eddie Lampert, through his personal stake and the holdings owned by his investment firm ESL, and Fairholme collectively own more than 75% of Sears. So, any moves by Lampert and Fairholme to prop up Sears go a long way toward easing some of the insolvency and bankruptcy worries.
The last chance
Was no surprise that Sears Holdings got into a stew after earlier this year, Sears announced plans to close 150 Sears and Kmart stores. That will save Sears nearly $1 billion in operating costs and may help it trim its massive debt load.
Sears also sold its Craftsman brand of tools to save more money. And now, they are looking to sell its Kenmore appliances and its Diehard auto parts businesses too.
Sears also set up a public company for some of its real estate assets – Seritage Growth Properties – and separated pieces of its Sears Hometown and Outlet Stores division, Lands’ End and Sears Canada.
Recently, Sears started to speak about “substantial doubt” regarding its ability to continue as a going concern. They said that the company is trying to mitigate “the substantial doubt raised by our historical operating results” and also satisfy an estimated liquidity needs.
The real motive
It is known that an 80 per cent stake in Sears was worth less than $700 million a week ago. However, Lampert, ESL, and Fairholme together are holding around $2 billion of Sears debt and own a substantial proportion of Seritage, which has a big market piece of $2.4 billion. So, as we see, Lampert and Berkowitz have much more money tied up in Sears’ debt and in related companies. That gives Lampert and Berkowitz a high motivation to keep Sears operating as long as possible.
Likewise, Seritage Growth Properties get more than 60 per cent of its property rent from Sears Holdings. So, even in long-term perspective, Seritage is willing to replace whole Sears e-commerce activity by property renting business, it would be a big trouble if Sears suddenly went bankrupt and stopped functioning.
Forget about buying Sears Holdings stock
Eddie Lampert and Bruce Berkowitz may probably think that by “harden” their ownership of the company; they will influence the timing of its seemingly inevitable death. Now, they need this really badly because Sears had to repay the debt they hold but Seritage is still young and needs more time to increase its tenant base.
So far, there isn’t any reasonable strategy for returning Sears Holdings to profitability. Its customer base is rapidly decreasing and the company cannot make the investments that are essential to keep up with its competitors.
Maybe Sears “enthusiasts” will have a few days or weeks of glory, but it is clear that later the company will get bankrupt. So, traders should think very carefully before buying Sears stock although now it may look like a piece of gold.
The Motley Fool’s co-founders, David and Tom Gardner also warned to be careful while investing to this company’s stock. Gardners are famous for very accurate predictions of market movements. That is why many investors consider their opinion to be a good signal to buy. The Motley Fool recently announced a new “total conviction stock”… and for sure in their list Sears Holdings did not appear.