The Bizarre Case of Sears Holdings

Concerns that Sears (SHLD) is headed toward bankruptcy have been reignited. The company's shares closed Wednesday down more than 12 percent, falling below $8, after the struggling department store expressed doubt about its future as a retailer. "Our historical operating results indicate substantial doubt exists related to the company's ability to continue as a going concern," Sears said in an annual filing with the Securities and Exchange Commission. (source: "Sears tells investors nothing's changed, despite 'going concern' statement," Krystina Gustafson, CNBC, Mar 22 2017)

Headed for bankruptcy, right? Yet...

Hopes raised by a chairman’s letter on future strategy March 9 were crushed Wednesday when Sears Holdings listed a “going concern” statement in its annual report. The same day, Bruce Berkowitz increased his position in the dying retailer 2.05% in his third purchase of the month. (source: "Bruce Berkowitz Buys More Shares of Sears," Holly LaFon, GuruFocus, Mar 23 2017)

Huh?

An insider, who owns about 26% of the shares and also owns some loans(?)/debt, adds more common shares*.

Not just that, it is one of the best investors over the last few decades**.

And, he happens to be a value investor***.


I have been thinking about this a lot lately...


Are we looking at a Bill Miller buying Bear Stearns in 2008 (or me buying Ambac)? Or is this one of the rare buying opportunities of our lifetime--Berkowitz used those same words to justify his Sears purchase a few years ago with disastrous outcome?




SIDE NOTE:
* Given the precarious situation Sears is in, and the somewhat low prices the bonds are trading at, he could have just bought those (which are trading way below par and will likely earn at least 15% annualized return for the next 10 years if the company doesn't go bankrupt).

** I'm not a huge fan of Bruce Berkowitz--quite frankly, I don't understand his thinking and strategies, from the more recent Fannie/Freddie preferreds to the older bets on St. Joe, and yes, Sears--but he still has one of the best records of any public investor and I admire him as a master contrarian.

*** If this were a different type of investor, say a short-term trader, quant investor, special situation investor, and so forth, it may not signal much. Even with most hedge fund investors, it may not mean much (since they could be hedging or something). But mutual fund value investors tend to buy undervalued stocks so it means a lot.