Here we go again...

I'll tell you what - owning Sears Holdings is not for the faint of heart.  

In the last year, we've seen the spinoff of Orchard Supply, a rights offering for Sears Hometown, and the partial spinoff of Sears Canada.  A small handful of stores/lease-rights were sold (for almost half a billion dollars), and a number of other stores have been closed down.  Sears's Chairman, Eddie Lampert, has purchased roughly 7 million shares for his personal account (representing 6-7% of the company).  Yet, at the same time, we've seen the core retail operations continue to flounder, with no turnaround in sight.  

Recently, in an interview with Fortune, Bruce Berkowitz (one of my favorite investors and the largest owner of Sears behind Eddie) said "the value of Sears would be over $160 a share if the land on its books was fully valued."  He then went on to say "I think Eddie Lampert will end up being one of a few unbelievable case studies on what it means to be a long-term investor."  Here's the link to the full interview: http://finance.fortune.cnn.com/2012/11/26/bruce-berkowitz-fairholme/?source=yahoo_quote.

Anyway, I continue to be optimistic about Sears (depending on your perspective, feel free to replace the word "optimistic" with stubborn, foolhardy, etc.).  So, on Friday I took advantage of the stock's recent decline and bought 20 contracts of the Jan 2015 $85 LEAPS at $1.87.  Including commissions, this cost me a total of $3,759.  Wish me luck!

Questions?  Comments?  Email mevsemt@gmail.com

All man's miseries... (Q3 D&A)

So, it occurs to me that my blog is becoming pretty damn boring.  In fact, in terms of trading, I'd say my 2012 portfolio activity is slightly less exciting than watching paint dry.  How come?

Well, maybe you've heard the saying, "All man's miseries derive from not being able to sit in a quiet room alone" (Pascal).  Or, if you're a value investing groupie like me, maybe you remember Pabrai saying "The correct way to set [the investment business] up is to have gentlemen of leisure, who go about their leisurely tasks, and when the world is severely fearful is when they put their leisurely tasks aside and go to work."

So where's the fear?  Sure, we hear about our growing debt/deficit, our political system is a mess, and global tensions continue to rise.  But the market continues to hit new highs!  Meanwhile, I continue to pare back investments and raise cash.  So are investors, collectively speaking, whistling past the graveyard?  Or am I the investing equivalent of chicken little?

Anyway, going back to Pascal and Pabrai, I think this is the perfect time to sit on your ass and do nothing.  Remember, when it comes to investing, temperament is half the battle, and being comfortable with inactivity (and a high % of cash) can really come in handy.

Anyway, now that I've put in my 2 cents, let's talk performance.

• I came into the year with $138,179, and in June I withdrew $10K from my account.  I finished Q3 with $209,194.
• My annualized rate of return for 2012 is 86.9% vs. 21.1% for the S&P (assumes dividends reinvested and 10K had been withdrawn from my "Hypothetical S&P" portfolio, thus keeping the comparison to be apples-to-apples).

Below are the following exhibits: 6+ year performance summary, waterfall graph, holdings summary, and quarter-to-quarter bridge (all values are as-of 9/30/2012, click to enlarge).

Questions?  Comments?  Email mevsemt@gmail.com

Sears Rights Offering...

For those of you following Sears Holdings, you know they distributed rights to purchase shares in their upcoming spin off - Sears Hometown and Outlet Stores (will be traded under SHOS when listed in October).  Specifically, for every regular share of Sears I own (excluding options), I received one SHOS right (traded under SHOSR).  Each right entitled me to buy roughly .22 shares of SHOS at $15.  Given that I own 400 shares of SHLD, I could've used these rights to pick up 87 shares of SHOS for about $1,305 (note: this excludes any impact of the SHOSR over-subscription privilege).

Now, this has special-situation written all over it, and at $15 a share I think SHOS could be a good value.  Nonetheless, I sold SHOSR yesterday at $2.60 per right, for total proceeds of $1,035 (after fees & commissions).  Here's why...

Had I exercised my rights, I would've foregone the sale proceeds of $1,035.  So, the real economic cost for me to participate in the spin off would've actually been $1,305 + $1,035 (cost of shares plus foregone proceeds), which equates to almost $27 per share for SHOS.

Questions? Comments? Email mevsemt@gmail.com.

Q2 Review and Commentary

Before I get into a review of my holdings and performance, let's do a little housekeeping.  On June 25th, I withdrew $10,000 from my account.  This is shown on the "My Returns So Far" page (link to the right) and is also reflected in all the quarter-end exhibits further down.

Additionally, as I'm typing, it occurs to me that I haven't written a new post since April (when I sold my AIG warrants), so I apologize for the lack of activity.  It's not that I haven't been thinking about investing, it's just that I haven't had anything especially insightful to say or do.  It's also worth mentioning that the AIG transaction took me to roughly 45% cash, and given the recent market decline, the timing couldn't have been better.  In fact, in my April post I lamented, "with the overall market close to it's 52-week high, I thought now may be a good time to raise some cash for the next rainy day."

Alright, now let's get to the good stuff.  

• I came into the year with $138,179.  At the end of Q1 I had $246,569, and I finished Q2 with $206,988.  Had I not withdrawn the $10K, I would've finished the quarter with $216,988.
• Although I went backward in Q2, the good news is I'm still way ahead of the S&P for the year.  In fact, for the first six months I'm up roughly 57%, whereas the S&P is only up 9%.

Below are the following exhibits: 6+ year performance summary, waterfall graph, holdings summary, and quarter-to-quarter bridge (all values are as-of 6/30/2012, click to enlarge).  

I remain as comfortable as ever with my current holdings (BAC, JEF, LUK, and SHLD).  In fact, given the market's recent pullback, I think all of them represent pretty compelling values.  Even more importantly, they're all run by fantastic leaders who are focused on building shareholder value.

BAC continues to strengthen their balance sheet and has made significant progress with their back-to-basics business transformation.  In the not-to-distant future, they should be allowed to start returning cash to shareholders via dividends and buybacks.  In Moynihan we trust!

As CEO Handler says about JEF, "We are the nicest property in a devastated neighborhood."  Well I guess that's one way to put it!  The fact is JEF operates in what could be a pretty attractive industry.  Unlike their peers (Goldman Sachs, Morgan Stanley, etc.), JEF has used the recent economic turmoil to hire talent and make acquisitions on the cheap.  Over the next few years, I think we'll see significant earnings growth as these investments start to pay off.

I don't have a whole lot to say about LUK.  I'm not thrilled that their Chairman, Ian Cumming, has indicated that he doesn't plan on renewing his employment contract in 2015.  However, I am confident that LUK leadership will continue to faithfully build wealth for their shareholders, and I'm curious see what Justin Wheeler (the new COO) can accomplish in his expanded role.

And of course there's SHLD.  I've written about this one ad nauseum, so I'm going to keep it short.  However, to even the passive observer, it's clear the transformation has begun.  So, even if you're not a shareholder I'd keep an eye on this one, things could get interesting.

And finally, let's talk about what's next.  Given my high cash %, I'm looking to put some money to work.  However, I find myself struggling to actually pull the trigger (which is nothing new).  Part of it's the hope that stocks will get cheaper.  The other issue is that I've found a handful of opportunities that are pretty compelling, but I'm having trouble deciding which 1 or 2 to buy.  Here's what I'm looking at most closely: CNQ, VRX, JCP, SCHW, EXPD, SD, XCO, and AIG.  Interestingly enough, I've previously owned JCP, SD, and AIG. If anyone has researched any of these companies, feel free to share!

Questions?  Comments?  Email mevsemt@gmail.com

It's so hard to say good-bye...

Today I sold my position in AIG TARP warrants for proceeds of $37,944 (3,000 warrants at $12.65).  Thanks to the Herculean efforts of CEO Benmosche and Chairman Miller, this investment has turned out extremely well for me.  And because of my confidence in these executives, and the solid franchise of AIG's core operating businesses, it's with a heavy heart that I decided to sell.  Nonetheless, anytime a stock is bumping up against its 52-week high I start to get nervous.  Besides, with the overall market close to it's 52-week high, I thought now may be a good time to raise some cash for the next rainy day.

For those of you keeping track, I first purchased 2,000 warrants in August 2011 at $6.94, for an initial outlay of $13,885.  In November 2011, I added 1,000 more at $5.37 for $5,375.  All-in-all, my total cost basis was $19,260, which means I made a profit of $18,684 on this position... not too shabby!

Questions?  Comments?  Email mevsemt@gmail.com.

Quick Update

This post is just a quick update on a transaction I made today.

As you'll recall, I trimmed my Sears position (by selling Jan 2013 $95 calls) earlier this year.  However, the last month or so has not been kind to the stock (it's fallen from the mid-80's to the high 50's), and I figured I'd use this pullback as an opportunity to add to my position.  Specifically, I purchased 10 Jan 2014 $85 LEAPS at $4.35 per contract, for a total outlay of $4,362.

Questions?  Comments?  Email mevsemt@gmail.com

Returns as of Q1 2012

Well I'll just come out and say it... this was a great quarter!  As you may recall, after a rough 2011, I entered 2012 with a very concentrated portfolio of just 5 companies.  Interestingly enough, two of these companies (BAC and SHLD) had been major contributors to last year's poor performance.  Here's a quote from my year end write-up (http://mevsemt.blogspot.com/2012/01/2011-returns.html):

So what went wrong in 2011?  Three things: SHLD, BAC, and JOE.  And I'm not sure whether to call it stubbornness or arrogance, but I've effectively doubled down on Sears and re-initiated a significant position in BAC.  My hope is 2012 will prove to be a better year for these struggling companies, and with Sears's assets and BAC's core business, they both have a ton of potential. 

So far it looks like my stubbornness has paid off, as both companies have rallied quite a bit.  Here's a quick summary of where I stand overall:

• I came into the year with $138,179.  As of 3/31/2012, my portfolio had appreciated to $246,569, for a total gain of $108,390.  Since I didn't deposit/withdraw any money, this increase was straight appreciation.  
• My portfolio is up 78% YTD, while the S&P is up 12%.

On a cumulative basis, my returns for the last 6 years and 3 months are summarized below vs. the S&P (click all pictures to enlarge).  I also updated the "My Returns So Far..." page to the right.

Here's a waterfall graph that shows a little more detail.   The blue bars are the beginning and ending balances, the green bars show appreciation/depreciation, and the red bars represent deposits.

Below are my current holdings, along with their current value, cost basis, and any unrealized gain/loss.

I also added a new display - a bridge between 12/31/2011 and 3/31/2012.  As you can see, I exited one position during the quarter (SHLD Jan 2013 calls for $18.2K), which is reflected in the increased cash balance.

As for closing remarks, I'd like to stress that with a portfolio as concentrated as mine, sometimes the stars will align and things will work out for no other reason than dumb luck.  Going forward, I don't expect to ever have another quarter like this one, nor do I expect to continue beating the S&P by the almost 20% per annum I've done historically.  However, my hope is I'll continue to beat the market by a reasonable amount, after all the name of my blog is "Me vs. Efficient Market Theory."

As always, I'm happy to answer questions and I appreciate comments.  Feel free to email me at mevsemt@gmail.com.

He who rides a tiger is afraid to dismount...

That Chinese proverb just about sums up my feelings on Sears Holdings, which has been on an absolute tear in 2012.  Nonetheless, after much deliberation (and honestly, angst), I decided to trim my position once again.  Specifically, on Friday I sold my remaining 25 contracts for the Jan 2013 $95 options at $6.80, generating proceeds of $16,986 (I'd sold the other 10 contracts in February 2012 for proceeds of $1,239).

For those of you following my blog, you know I first bought these particular options all the way back in November 2010.  Between then and August 2011, I added to my position 3 more times (click on the "zz Sears" label to the right to read about all my Sears transactions).  When all was said and done, I'd invested $14,592.  Then came December 2011, which was not kind to Sears investors.  In fact, as of 12/31/2011, my 35 contracts were worth $210 (that's no typo, my $14.6K investment had shrunk to two hundred bucks!).  Now, less than 3 months later, those same 35 contracts have been sold for total proceeds of $18.2K!

But why sell now, after all things are just getting interesting?  Well remember, I'm not selling out of Sears, but rather just trimming my position.  In fact, back in December when things were looking really bleak, I bought $18,329 of stock plus an additional $4,012 of Jan 2014 $55 options.  So, given my significant exposure to Sears from these purchases, I could no longer justify holding options that were both 1) out-of-the-money and 2) had less than a year until expiration.

Questions?  Comments?  Email mevsemt@gmail.com

‘Cause the loser now will be later to win…

Well there you have it.  I’ve been banging my head against the wall over Sears Holdings for almost a year and half, and until recently had nothing to show for it other than significant losses.  Nonetheless, despite floundering retail operations, I continued to believe there was significant value in the brands, real estate, etc.  Here’s a quick trip down memory lane…

Starting in November 2010, I began buying call options.  Over the next 13 months, I added to my Sears position ON FIVE ADDITIONAL OCCASIONS, with the latest purchase in December of 2011.  If you’ve got some time to kill, click here (http://mevsemt.blogspot.com/search/label/zz%20Sears) to see all my previous commentary and real time transactions.  By the way, at year end 2011 prices, I had lost money on every single one of these purchases.

But then something happened.  Starting in 2012 Sears began to take off.  And today Sears is up an additional 20% after releasing earnings and publishing Chairman Eddie Lampert’s annual shareholder letter.  Why?  Well, I’ll let you read the letter yourself (http://searsholdings.com/invest/index.htm#letter), but in short, Sears is doing exactly what I hoped/predicted.  They are selling and distributing some of their assets and operations.  As a result, the market is starting to see Sears as a collection of valuable assets, and not just a struggling retailer.

So how will this turn out for me?  Well, as of now I have no idea, but I’m happy to say my position in Sears has turned positive, and by a healthy amount.

Questions?  Comments?  Email mevsemt@gmail.com.

Quick Update

Yesterday I sold 10 Sears Jan 2013 $95 call options at $1.25 per contract.  If you've been following the stock, you know it's taken off in 2012.  In fact, between my call options and common stock, Sears was roughly 12% of my total portfolio coming into the year.  Before yesterday's transaction, it had gone up to 22%.  So do I think Sears is overvalued?  No, not by a long shot.  However, since it had become the single largest position in my portfolio, I figured the best thing was to be prudent and trim it back a little.

Questions?  Comments?  Email mevsemt@gmail.com.

2011 Returns

Yikes.  Ouch.  Crap.  Well, that about sums it up for 2011.  Here's a quick summary:

• I came into the year with $126,967.  During the year I deposited $35,000 into my account.  By year end my holdings had DEPRECIATED by $23,788, leaving me with $138,179.
• My IRR for 2011 was -15.7% vs. +1.0% for the S&P (assumes dividends are reinvested AND the $35K I deposited was used to buy additional SPY shares at that day's closing price).

Although 2011 was a kick in the teeth, my cumulative returns for the past 6 years are still well ahead of the S&P.  Below are the details (click to enlarge):

I also included a waterfall graph that shows a little more detail.  The blue bars are the beginning and ending balances, the green bars show appreciation/depreciation, and the red bars represent deposits (click to enlarge):

And lastly here are my current holdings (click to enlarge):

So what went wrong in 2011?  Three things: SHLD, BAC, and JOE.  And I'm not sure whether to call it stubbornness or arrogance, but I've effectively doubled down on Sears and re-initiated a significant position in BAC.  My hope is 2012 will prove to be a better year for these struggling companies, and with Sears's assets and BAC's core business, they both have a ton of potential.  I'm also optimistic on the rest of my portfolio, but due to macro uncertainty, I'm also keeping a large % of cash.

Questions?  Comments?  Email mevsemt@gmail.com.