Monday, March 28, 2011

A Short Analysis

First, a disclaimer: this post should be put in the "food for thought" bucket and really wasn't part of my thought process when I bought SHLD LEAPS.  Nonetheless, I hope you find it interesting...

Sears is a pretty controversial stock; some view it as a collection of assets (real estate, brands, inventory, Sears Canada, etc.) and believe it's trading at a sum-of-the-parts discount, others think of it as a slowly-but-surely failing retailer with virtually no chance of a turnaround (which has created a huge short interest).  I invested in Sears b/c I'm part of the first group, yet I totally understand the second group's perspective... HOWEVER, what I don't understand is why anyone would short the stock.  Here's why:
  • A small group of VERY patient long-term investors control a huge % of the stock and are unlikely to sell at anything close to current prices.  This group includes ESL, Fairholme, the Tisch family, and probably some others (ex. Francis Chou). 
  • Under Eddie Lampert SHLD has been a serial repurchaser of stock, and as long as the stock stays under $100 there's no reason this won't continue.
So where does this leave us?  Click on the image below to find out. 

As you can see, if Eddie keeps repurchasing shares at this pace the short interest quickly becomes 100% of the remaining "free" float!  Hmmm... I'm no expert, but it feels like something's gotta give. 

At this point you may be wondering "so what?"  Well (and this is pure speculation), IF this dynamic is indeed setting the stage for a massive short squeeze, a high stock price can be a very useful tool in the hands of an experienced capital allocator.  Check out this article and maybe you'll notice some parallels,,0,6287747.story

Lastly, for reference here are the previous posts I wrote when I was buying the LEAPS: and

Questions?  Comments?  Email