Is Sentiment on SHLD Really Negative?

Jim Cramer has been pushing Sears Holdings (SHLD) because he believes the operations are improving and that sentiment on the stock is too negative…

What will mainstream media do now with Sears (SHLD:Nasdaq) ? What will they say? Eddie Lampert is taking no money, there’s no stock option issuance, he’s got a strategy of no longer giving goods away for nothing, and he’s returning capital to shareholders at an amazing rate. What can they say? How can they knock the guy? Can they keep up with that capital expenditures story? I mean, they can focus on the declining sales only for so long, because we like margins going up more than sales.

OK, excuse me for gloating, but I keep wondering what the heck Lampert did wrong to make it so that the mainstream media keep picking on him. We should hate executives who line their pockets with options while their stocks do nothing. We should like executives who take no pay unless the stock goes up. We should hate executives who glad-hand Wall Street and schmooze a stock up; we should like executives who stick to their knitting and don’t hold hands. We should hate executives who let all the upside go to them in the form of options and massive dilution. We should like executives who return every dime to the shareholders that they can.

Or, to put it another way, we should like the good guys who make us money and dislike the bad guys who lose us money. Shouldn’t we?

Let’s compare the executive pay issues and performance issues of Comcast (CMCSA:Nasdaq) and Sears. I don’t know anyone who ever knocks Brian Roberts. But all of his great performance is in the past. This stock has done nothing for seven years. Seven lean years! But Roberts has paid himself a fortune over that period — no, make that many fortunes.

Now Lampert, on the other hand, has a stock that performed unbelievably over the last two years, I mean amazingly, with its going up five times. It’s up 24% this year. But all anyone has been focusing on is how much it has come down from the high, the so-called 30% loss figure. Go read the 8-K: Lampert’s the polar opposite of Roberts when it comes to compensation.

Doesn’t matter, though. Right now, at this moment, someone in the mainstream media is going to pen a piece about how Lampert has no strategy and is simply a greedy hedge fund manager totally out for himself.

I admit it, I don’t get it. When people ask me why he gets such bad press, I just keep coming back to one issue: jealousy. Maybe because I started the same day he did at Goldman Sachs, maybe because I know what a funny and decent guy he is, maybe because I don’t know anyone who works harder than he does — and everyone knows I am a hard worker — I just can’t stand the press he gets.

For a while I stopped talking about Lampert. I figured maybe the press would stop picking on him if I didn’t write that he’s my friend. Didn’t seem to stop the negative ink, though.

Now I feel differently about it. With the float shrinking, with the Sears Canada dividend coming to us, with the real estate sales not even happening yet, with the whole darned thing worth less than $20 billion, I welcome all the short-sellers we can find.

Gentlemen, please place your bets. I am loving the odds.

It’s an interesting idea, especially considering the chart, which looks to be forming a nice base.  However, after doing a bit of research, it seems the sentiment on the stock isn’t nearly as negative as Cramer makes it out to be.  Aside from some negative newpaper articles, the sentiment on the stock is actually quite positive. 

First, the short interest has actually come down along with the stock.  The short interest ratio currently stands under 5, which is far from a negative extreme. 

Source: Bloomberg

In addition, the put/call ratio has fallen to 0 over the past several weeks, indicating that no one is buying puts. 

Source: Schaeffers Research

Finally, while not all the Wall Street analysts are positive about SHLD, they are also far from a negative extreme.  Here are the last four ratings changes on the stock from Yahoo Finance…

I was hoping that sentiment on the stock was truly negative and that could help launch the stock out of the base that it is forming.  However, based on the sentiment, I’m not sure if the stock has enough fuel to launch into a full blown short covering rally.  Therefore, the base could break either to the upside or downside…

In addition, the fundamentals don’t look so compelling that the stock is a no brainer buy.  At 17x forward earnings, the valuation is actually higher than many of the company’s peers in the department store industry. 

Source: Baseline

And according to Jeff "I’m not making this up" Mathews, the new stores aren’t that compelling that someone would shop there over Walmart, Target or Costco…

The Sears house brands—Craftsman tools and Kenmore appliances—give the stores a flavor entirely different from the previous failed occupant, while the electronics department is now bigger and more coherent than the old Kmart version, with row after row of flashy TV screens along the wall. And there is plenty of Martha Stewart merchandise everywhere, from towels to $250 artificial Christmas trees.

The theory behind Essentials is that by expanding distribution of widely recognized (and still trusted) Sears house brands into Kmart locations that previously failed to generate enough business to justify the lease payments, Sears Holdings would generate higher sales and transform a liability—a long-term lease in a mediocre location—into an asset. The basic idea being that one plus one would equal three, maybe four.

Indeed, like its counterpart in northeastern Connecticut, this L.A. Essentials store had shoppers—not nearly so many as the clean, well-lighted, terrifically merchandized Target store a few miles away, but it had some shoppers.

Yet as I walked around the store and saw the merchandise placed with its usual Sears cluelessness, I found myself understanding why the whole thing seems so inconsequential: by opening Sears Essentials stores in old Kmart locations, all that has happened is…Sears has opened a bunch of new, mediocre stores.

That’s all.

The bottom line is that the stock might work, but the sentiment, fundamentals and valuation don’t nearly represent the explosive upside potential that Cramer makes the stock out to posses.  In the near future I hope to post another turnaround retail idea that I think is more compelling than SHLD.