My Portfolio

Here is my actual portfolio of stocks that I have written about on HypeZero:

Company Position Purchase Date Start Average Price Current Price Performance
AIG Long Shares 9/11/2012 $34.18 $35.70 +4.4%
AIG Long Jan ’14 $45 Call Options 11/16/2012 $1.96 $1.86 -5.1%
GM Long Shares 7/09/2012 $20.15 $24.59 +22%
OSH Short Shares 9/14/2012 $13.83 $12.52 +9.5%
SUSS Long Shares 10/15/2012 $34.84 $35.95 +3.2%
DF Long Shares 10/17/2012 $16.97 $18.30 +7.8%
  • GM and AIG are two stocks that I am extremely bullish about and am continuing to add to my positions.
  • I am not adding to OSH short position unless it goes up considerably and business fundamentals remain same
  • I am not adding to SUSS position unless it goes down.
  • I am not adding to DF long position until I see what the pricing of the WhiteWave IPO is.

Other stocks I wrote about:

  • Genie Energy (GNE) – Although I think this stock is undervalued, I could not get myself to buy the company due to the deteriorating results of IDT Energy.
  • Sears (SHLD) – Although they are doing a good job of divesting of businesses with spin-offs, there are too many uncertainties with the company. Also, business fundamentals are deteriorating.
  • Apple (AAPL) – I love Apple, but I am taking a wait and see approach. I don’t see any catalyst for the stock in the near term future. 

   

Sears Spin-off To Trade Friday

Sears LogoThe latest Sears (SHLD) spin-off that I warned investors to stay away from, Sears Hometown and Outlet Stores (SHOS) will start trading this Friday October 12, 2012.

“Sears Holdings expects to distribute a total of 23,100,000 shares of Common Stock to the holders of subscription rights who validly exercised their subscription rights and paid the subscription price in full, including pursuant to the exercise of the over-subscription privilege.” Based on the subscription rights price, the shares are expected to trade around $28/share. 

Sears will receive almost $450 million in gross proceeds from the spin-off. This is great news for Sears shareholders. Not only does this alleviate liquidity concerns that investors had earlier this year, but it also gets rid of an unwanted business.

I expect the shares to trade higher as investors are lured by the low P/E ratio, but eventually the shares will come down due to deteriorating business fundamentals much like its last spin-off, Orchard Supply Hardware (OSH).

From an amended 13D filing report on September 26, Eddie Lampert is already shedding Sears Hometown. He used to own 62% of Sears Hometown, but now owns less than 60%. I will update investors in November when ESL Investments Quarterly Holding Report (13D) comes out about his stake in Orchard and Sears Hometown. See the 13D filing here.

Read the full press release here.

Disclosure: I do not own shares of Sears (SHLD). I am short Orchard Supply Hardware (OSH).

Hyster Yale Materials Looks Fully Valued

Hyster Yale (HY) at today’s closing price of $40.52 seems fully valued. In our pre spinoff valuation article, we had Hyster at $640 million or $38/share. As we mentioned earlier, Nacco (NC) seems undervalued. 

If you like this article or any of our articles, please leave a comment or share on any of the social sites below.

Disclosure: I do not own shares of HY or NC.

Avoid Sears Spinoff

Sears Holdings Corporation (SHLD), a HypeZero recommendation, in order to raise capital and focus on its main business is spinning of yet an another business, Sears Hometown and Outlet (SHOS). (Read our article on its last spinoff, Orchard Supply Hardware (OSH)).

Business

Sears Hometown and Outlet operates two segments: Sears Hometown and Hardware and Sears Outlet. Sears Hometown and Hardware, the larger of the two with 1,105 stores, sells “national brands of home appliances, tools, lawn and garden equipment, sporting goods, consumer electronics and household goods, depending on the particular store.” The Outlet segment with 123 stores sells “new, one-of-a-kind, out-of-carton, discontinued, obsolete, used, reconditioned, overstocked and scratched and dented products, including home appliances, lawn and garden equipment, apparel, mattresses, televisions, sporting goods and tools at prices that are significantly lower than manufacturers’ suggested retail prices.”

Spinoff

For each Sears share held, investors received a subscription right (SHOSR) that would allow them to purchase 0.218091 of a share of SHOS common stock at $15/share. So you would need ~4.59 (1/.218091) subscription rights and $15 to purchase 1 share of SHOS. Currently, SHOSR is trading at $2.33. So, you would expect SHOS to start trading at 4.59*$2.33 + $15 = $25.7/share.

Holders of SHOSR have until October 8 to exercise the subscription right. If the offering is fully subscribed, Sears expects to raise $446.5 million (23.1 million shares*$15/share + $100 million SHOS will pay to Sears).

Valuation

Sears provided the latest quarterly report for SHOS. A cursory read of the report point to a great deal for investors:

  • For the 26 weeks ended July 28, 2012, revenues are up over 4% and net income is up over 100% to $41.66 million or $1.80/share. If SHOS earns $3.60 for this fiscal year, it would trade a P/E of a little over 7 at the current subscription rights price.
  • Other valuations measures such as sales per share ($100+/share) seems to indicate that SHOS is cheap compared to its peers. 
  • ESL Investments (Eddie Lampert), Sears biggest shareholder, has said that it fully intends to exercise its subscription rights. “In addition, ESL has indicated to Sears Holdings that it intends to exercise its over-subscription privilege in full, such that it will purchase the maximum number of shares allocated to it under the oversubscription privilege.”
Lipstick On A Pig
 
However, a closer look reveals that:
 
  • From 2007 to 2011, comparable store sales have been down every year.
  • From 2007 to 2011, total store sales have been flat to slightly up due to an increasing store count.
  • From 2009 to 2011, the gross profit margin rate and net income have been down every year.   

So, what happened in the first 2 quarters of 2012? Why the triple digit increase in net income?  The simple answer is that the increase in net income came from substantial improvements in the gross profit margin rate. The margin rate increased in 2012 to 25.2% from 21.6%. 

Sears explains the dramatic margin improvements: “The 360 basis point increase in gross margin rate was primarily driven by lower occupancy expenses from the conversion of company-operated stores to franchisee-operated stores, initial franchise fees, lower free-delivery promotional expense, better inventory management, and a higher balance of sales in higher margin categories”. 

It is interesting that the first few reasons for the significant margin improvements are from converting company-operated stores to franchisee-operated stores. It is not a coincidence that they waited until they were spinning off the company to do this conversion and thus, improve profitability. 

Another reason that profitability improved is the $15 million charge it took in 2011 to close 84 under performing stores. This has two effects:

  • The net income in 2011 is lower. Thus, the 2012 net income will look better.
  • As it closed underperforming stores, the profit margin rates, and comparable store sales improved in 2012.  

It seems Sears is trying to fool investors into thinking the underlying fundamentals of the company are improving when they clearly are not. In addition, the following costs have not been taken into account in the income statement:

  • There will be an “additional annual operating charges are estimated to be approximately $8.0 million to $9.0 million” from being a public company.
  • “One-time information technology costs related to the separation to be approximately $6.0 million to $7.0 million.”
  • Interest expense from the $100 million borrowed from the Senior ABL Facility in order to pay Sears.
If you add to the fact that $167 million of SHOS’s equity is not tangible, it operates in one of most competitive industries, and it is heavily dependant on Sears, you have a multitude of reasons to avoid the spinoff of Sears Hometown and Outlet.

Disclosure: I do not own shares of SHLD or SHOSR and I do not plan to initiate a position within the next week. 

Fooling Some of the People All of the Time

A great book on some of the risks of investing in BDCs is Fooling Some of the People All of the Time, A Long Short by David Einhorn of Greenlight Capital. It details his struggle to out the fraud that was taking place at BDC, Allied Capital.

By no means am I saying there is any fraud taking place at Prospect Capital or any other BDC, but it gives investors insight into the possible risks associated with them.