Sears Holdings Corp (SHLD), J.C. Penney Company, Inc. (JCP), Macy’s, Inc. (M): Hedge Fund Manager Still Bullish on This Real Estate Play

Bruce Berkowitz from the Fairholme Funds continues to aggressively buy Sears Holdings Corp (NASDAQ:SHLD). Fairholme’s latest 13F showed that Berkowitz added 1,362,200 shares to his holdings. The fund now has 10.80% of its 13F portfolio invested in Sears. Berkowitz has been a steady buyer of the stock over the years, even in the face of price weakness. This indicates a strong bullish bias from one of the smartest minds in the business (see Berkowtiz’s portfolio).

An undervalued and unloved stock

Sears Holdings Corp (NASDAQ:SHLD) Chairman Eddie Lampert has said of Sears:

Sears Holdings has over $20 billion of assets on our balance sheet. In some cases, the fair market values of our assets are not reflected on the balance sheet due to GAAP convention, such as the value of our owned real estate and many of of our below market leases. We have a portfolio of businesses and assets that deserve to generate substantial value for our shareholder.

Likewise, the President of Sears Holdings Corp (NASDAQ:SHLD)’ Real Estate Development, David Lukes, has said, “Sears Holdings has one of the most diverse and valuable real estate portfolios in the country and I look forward to creating additional value for the company by enhancing and repositioning selected parts of its real estate portfolio.”

Bruce Berkowitz has said of his investment in Sears, “Many despair that Sears seems unable to regain past retail glory, despite a conservative balance sheet and many valuable assets. In searching for instant gratification, most are missing key points.”

Berkowitz says the best way for investors to analyze and value Sears Holdings is by using Benjamin Graham’s Margin of Safety. This refers to the difference between the market price and the intrinsic value of the underlying business. In using Margin of Safety, there are several key points:

New retail centers are not being constructed like they were in the past.

The urbanization trend continues to drift towards metropolitan centers.

Sears Holdings Corp (NASDAQ:SHLD) and Kmart leases often exceed 50 years with no rent escalators.

Kmart retains the right of first refusal on potential purchases of its leased properties.

Sears is typically an anchor tenant in most mall locations.

Sears and Kmart properties have few, if any, operating covenants or restrictions.

Sears and Kmart have negotiating leverage due to co-tenancy clauses of adjacent retailers.

Accounting rules did not require Kmart to revalue its real estate after its merger with Sears.

Looking at both Sears and Kmart, we see that they comprise over 250 million square feet of retail space. This is more than the square footage controlled by the largest mall owner in the U.S., Simon Property Group, which has a current market cap of $55.69 billion versus Sears’ $6.19 billion.

Hidden brand value

Deep inside Sears Holdings Corp (NASDAQ:SHLD), besides the real estate assets, are several key retail brands. Sears is the leading home appliance retailer with its Kenmore brand. The company’s Craftsman brand is the number-one line of tools and is a brand of lawn and garden equipment as well. Finally, Sears is a leading exercise equipment seller.

There’s more good news. Other retailers like Costco and Ace Hardware have begun to sell Sears’ products, and Sears Holdings Corp (NASDAQ:SHLD)’ Lands’ End catalog also has significant room for expansion, both domestically and internationally.

Competition

In analyzing Sears’ stock, it’s best to compare the company to J.C. Penney Company, Inc. (NYSE:JCP), Macy’s, Inc. (NYSE:M), Target, and Kohl’s.