Billionaire Edward Lampert’s Failed Transformation of Sears and His Top Stock Picks for Q4

The hedge fund investors monitored by the Insider Monkey team have now filed their quarterly 13Fs, data which we continue to sift through to reveal high-potential stocks. Although some tend to believe that because these public filings offer delayed insights about hedge funds’ stances on different companies and do not disclose the full picture of their portfolios, that their usefulness is limited. However, our research has shown that 13F filings can be used as a verified stock picking selection tool (more on that later). The following article will discuss the top-five stock picks of value-focused hedge fund manager ESL Investments, which was established by Edward S. Lampert back in 1988 after he worked in the risk arbitrage department at Goldman Sachs. ESL Investments categorizes itself as an aggressive conservative hedge fund, and generally acquires sizable stakes in seemingly undervalued and highly-researched companies. With this in mind, let’s proceed with the discussion of billionaire Edward Lampert’s largest equity holdings at the end of the September quarter.

At Insider Monkey, we track hedge funds’ moves in order to identify actionable patterns and profit from them. Our research has shown that hedge funds’ large-cap stock picks historically underperformed the S&P 500 Total Return Index by an average of seven basis points per month between 1999 and 2012. On the other hand, the 15 most popular small-cap stocks among hedge funds outperformed the S&P 500 Index by an average of 95 basis points per month (read the details here). Since the official launch of our small-cap strategy in August 2012, it has performed just as predicted, returning 102% and beating the market by more than 53 percentage points. We believe the data is clear: investors will be better off by focusing on small-cap stocks utilizing hedge fund expertise (while avoiding their high fees at the same time) rather than large-cap stocks.

#5 Gap Inc. (NYSE:GPS)

 – Shares Owned by ESL Investments (as of September 30): 3.93 Million

 – Value of Holding (as of September 30): $111.92 Million

Billionaire Edward Lampert upped his position in Gap Inc. (NYSE:GPS) by a whopping 1.87 million shares during the turbulent third quarter. The global retailer of apparel, accessories, and personal care products has seen its shares decline by nearly 40% this year, as the company has been struggling to turn around its Gap brand. Earlier this month, Gap announced third quarter net sales of $3.86 billion, compared with $3.97 billion reported for the same quarter of last year. The foreign exchange rate fluctuations negatively affected the company’s top-line, especially at its largest foreign subsidiaries in Canada and Japan. However, the stock is currently trading at a trailing price-to-earnings ratio of 9.49, which is substantially below the average of 22.70 for the S&P 500 Index. Larry Robbins’ Glenview Capital reduced its exposure to Gap Inc. (NYSE:GPS) by 700,000 shares during the latest quarter, ending the three-month period with 5.29 million shares.

#4 Sears Canada Inc. (NASDAQ:SRSC)

 – Shares Owned by ESL Investments (as of September 30): 26.21 Million

 – Value of Holding (as of September 30): $171.13 Million

ESL Investments stood pat with its stake in Sears Canada Inc. (NASDAQ:SRSC) during the September quarter, owning nearly 26.21 million shares. In November 2012, Sears Holdings Corp (NASDAQ:SHLD), which Edward Lampert has been CEO of since 2013, spun-off a portion of its interest in Sears Canada by distributing roughly 44.5% of the outstanding common shares of Sears Canada on a pro rata basis to shareholders of Sears Holdings’ common stock. The Canadian department store chain has been struggling quite seriously over the past several years. It has shut stores and reduced its workforce in an effort to enhance profitability, which has been hurt by fast-growing competition. The company’s second quarter comparable sales dropped by 3.8% year-over-year, after declining by 6.8% in the same period last year. Jim Simons’ Renaissance Technologies reported owning 43,000 shares of Sears Canada Inc. (NASDAQ:SRSC) through its latest 13F filing.

#3 Lands’ End Inc. (NASDAQ:LE)

 – Shares Owned by ESL Investments (as of September 30): 6.72 Million

 – Value of Holding (as of September 30): $181.56 Million

Edward Lampert’s hedge fund cut its position in Lands’ End Inc. (NASDAQ:LE) by 929,813 shares during the three-month period that ended September 30. In April 2014, the same Sears Holdings completed its spin-off of Lands’ End, which has been operating as an independent company involved in the multi-channel retailing business ever since. On September 3, the company posted second quarter net revenue of $312.4 million, which was down by 10.0% year-over-year. At the same time, its net income decreased to $7.5 million from $11.8 million. The shares of Lands’ End are down by 58% this year, but are currently trading at a cheap trailing P/E ratio of 11.86. Hedge fund D.E. Shaw & Co. L.P., founded by David E. Shaw, kept its stake in Lands’ End Inc. (NASDAQ:LE) unchanged during the third quarter at 325,000 shares.

#2 AutoNation Inc. (NYSE:AN)

 – Shares Owned by ESL Investments (as of September 30): 6.79 Million

 – Value of Holding (as of September 30): $395.12 Million

ESL Investments reduced its exposure to AutoNation Inc. (NYSE:AN) by 429,180 shares during the third quarter, ending the three-month period with 6.79 million shares. The automotive retailer has seen immense growth over the past several years, with its shares advancing by more than 143% over the past five-year period. This year has not been bad either in terms of stock performance, as the stock has advanced by over 5% year-to-date. Even so, shares are still trading cheaply if considering its trailing P/E ratio of 15.50. Earlier this month, the company reported October retail sales of 28,247 new vehicles, which marked an increase of 14% year-over-year. Glenview Capital holds a 1.75 million-share stake in AutoNation Inc. (NYSE:AN) as of September 30.

#1 Sears Holdings Corp (NASDAQ:SHLD)

 – Shares Owned by ESL Investments (as of September 30): 22.35 Million

 – Value of Holding (as of September 30): $505.04 Million

Expectedly, Sears Holdings Corp (NASDAQ:SHLD) represents the largest holding in Edward Lampert’s equity portfolio as of the end of the September quarter. Nevertheless, ESL Investments decreased its holding in the retailer by 3.09 million shares during the three-month period. It appears that the billionaire hedge fund manager has failed to turn around the struggling retailer since he became CEO back in 2013. Sears Holdings has completed numerous spin-offs, some of which we mentioned above, and keeps following the same strategy in an attempt to unlock shareholder value. Edward Lampert believes that Sears Holdings can achieve its much-needed turnaround, stating that “by raising such substantial capital in 2014 and 2015, we’ll now be able to accelerate our company’s transformation”. Meanwhile, the shares of Sears Holdings have plummeted by another 33% since the beginning of the year. Debra Fine’s Fine Capital Partners was bullish on Sears Holdings Corp (NASDAQ:SHLD) and the work Lampert is doing, holding a stake of 1.82 million shares as of the end of September.

Disclosure: None