Is Sears the Next Berkshire Hathaway?

A well-respected value investor buys an old American company in decline,
promising to restore its fortunes. Alas, the recovery never comes. The industrys
economics have changed, and the company cant compete with younger, nimbler
rivals. It ceases operations, but the value investor holds on to the shell to
use as an investment vehicle. Could this be the future of Sears Holdings
(NASDAQ: SHLD ) under Eddie Lampert? Maybe; maybe not. But it was certainly the
case for Warren Buffett's Berkshire Hathaway (NYSE: BRK.A ). Unless you're a
history buff or a dedicated Buffett disciple, you might not have known that
Berkshire Hathaway wasnt always an insurance and investment conglomerate. It was
a textile mill, and not a particularly profitable one. It was, however, a cash
cow. And after buying the company in 1964, Buffett used the cash that the
declining textile business threw off to make many of the investments hes now
famous for, starting with insurance company Geico. So, when hedge fund superstar
Lampert first brought Kmart out of bankruptcy in 2003, the parallels were
obvious. With its debts discharged, the retailer would throw off plenty of cash
to fund Lampert's future investments. And even if the retail business
continued to struggle, Lampert could and did sell off some of the company's
prime real estate to retailers in a better position to use it. Lampert sold 18
stores to Home Depot (NYSE: HD ) for a combined $271 million in the first year.
That Lampert would use Kmart's pristine balance sheet to purchase Sears,
Roebuck & Co. itself a struggling retailer seemed somewhat odd, but his
management decisions after the merger seemed to confirm that his strategy was
cash-cow milking. Lampert continued to talk up the combined retailer's
prospects, of course. But his emphasis was on relentless cost-cutting, and he
invested only the absolute bare minimum to keep the doors open. Sears Holdings
didn't have to compete with the likes of Home Depot or Wal-Mart (NYSE: WMT ).
It just had to stay in business long enough for Lampert to wring out every
dollar before selling off its assets. The strategy might have played out just
fine were it not for the bursting of the housing bubble, which killed demand for
Sears popular Kenmore appliances and Craftsman tools, and the onset of the worst
recession in decades. With retail sales in the toilet (and looking to stay there
awhile), competing retailers were hardly clamoring for the company's real
estate assets. It's fair to blame Lampert for making what was, in effect, a
major real estate investment near the peak of the biggest real estate bubble in
American history. But investors frustrated by watching the share price fall by
more than 80% from its 2007 highs have no one to blame but themselves. Anyone
who bought Sears when it traded for nearly $200 per share clearly didn't do
their homework. They instead were hoping to ride Lampert's coattails while
somehow ignoring the value investor's core principle of maintaining safety by
not overpaying for assets.