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SHLD anyone?


FCharlie
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Every time SHLD gets down to these levels I go through the basic liquidation analysis and find myself shocked at how low SHLD is being valued relative to it's assets. Are there any others out there who still own SHLD, or have all given up hope? Seems like there's only going to be three shareholders left (Lampert, Tisch, Berkowitz) if this pessimism keeps up.

 

Inventory (at cost) net of accounts payable is higher than the market cap. At retail price, owned inventory is significantly higher than the market cap.

 

Real Estate (at cost) is significantly higher than the market cap

 

Pension and mediocre cash flows are the largest problems here, although cash flow is enough to fund the pension even at these high levels.  Too many stores are losing money, yet they stay open, even though it would seem the company could make a lot of money if the lagging stores were closed... Shares outstanding keep shrinking. The company has recently put nearly all of it's stores up for lease, sale, or partial lease... A move that would have been very exciting in the past, but today, no one seems to care... Berkowitz, Lampert, Tisch seem to be the only ones left in this one, and judging from their statements in interviews and at the annual meeting, none appear concerned at all.

 

There's huge temptation here to go in big. Is it possible for these three to be wrong?

 

 

 

 

 

 

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I bought some SHLD today after seeing that it and RIMM were the only two companies in my watch list that were down.  I have owned SHLD before, but haven't had it in my portfolio for a while.

 

As much as I have been criticizing Lampert for not just spelling out what he's going to do with the real estate (my hope is that there will be a big deal with the better retailers out there to take over a number of cash bleeding Sears locations), I believe that the runoff value is easily above the current market price.

 

Hopefully, it goes down even lower.

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Funny, I added to SHLD last week at $45.60.  It's still my smallest position at ~5%, but the price does seem quite low.  Operational concerns aside, the current price offers pretty good odds as I wait for Eddie the python to swallow this pig. 

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"Inventory (at cost) net of accounts payable is higher than the market cap. At retail price, owned inventory is significantly higher than the market cap."

 

What about the $4 billion or so of net debt that would need to be paid off to own the business (or its assets) free and clear?

 

"Too many stores are losing money, yet they stay open, even though it would seem the company could make a lot of money if the lagging stores were closed."

 

Outstanding lease obligations.  Maybe they believe its better to cover part of your lease costs rather than none of it.

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The $45 strike 2013 put has a bid of $14.20.  The $45 strike call has an ask of $8.95.

 

Meanwhile the stock is $46.

 

Why are you guys buying the shares?

 

Because options strategies hurt my head! ;D

 

Also, call me old fashioned, but I just like to own companies or buy options to purchase stakes in companies. 

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The $45 strike 2013 put has a bid of $14.20.  The $45 strike call has an ask of $8.95.

 

Meanwhile the stock is $46.

 

Why are you guys buying the shares?

 

I am both short puts, and long stock at the same time. You are correct it makes no sense to own shares outright, but I too like owning the shares as well.

 

The premium is incredible. Why would the $30 2014 put trade for $10? SHLD would have to drop to below $20 for this to end up profitable for a put buyer. At that price, you're talking $2 billion market value, but also at $20, the company could easily take itself semi-private with cash on hand. They could do that now, but they could EASILY do it at $20.

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My options strategy gives you 1.59x leverage without increasing your downside.  Reinvest all of the proceeds from writing the put into purchase of the call.

 

Same downside.

 

1.59x upside.

 

I just went to pen and paper to calculate this out (can't do these things in my head). 

 

I see what you're saying.  Honestly, it never even occurred to me to look at the difference between the put and the call premiums.  Guess I should have.

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My options strategy gives you 1.59x leverage without increasing your downside.  Reinvest all of the proceeds from writing the put into purchase of the call.

 

Same downside.

 

1.59x upside.

 

Or buy the stock, lend it out and have more upside without expiration.

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Or buy the stock, lend it out and have more upside without expiration.

 

What Hester said... IBKR does lending now for small accounts.

 

Also, the bonds offer a wide range of ways to play this as well... true, not fully applicable to holdco, but sure provide some nice YTMs depending on what price you get.

 

Ben

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Or buy the stock, lend it out and have more upside without expiration.

 

What Hester said... IBKR does lending now for small accounts.

 

Also, the bonds offer a wide range of ways to play this as well... true, not fully applicable to holdco, but sure provide some nice YTMs depending on what price you get.

 

Ben

 

What steps need to be taken to lend out shares from an IBKR account?

 

Is this something you do from the workstation, or do you fill out a ticket asking them to help you?

 

And what lending yield are you getting?

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My options strategy gives you 1.59x leverage without increasing your downside.  Reinvest all of the proceeds from writing the put into purchase of the call.

 

Same downside.

 

1.59x upside.

 

I will admit to not considering options strategies because I am simply out of my depth there.  I've spent little time thinking about these things because they seem overly complicated and I fear the unknown.  But, if you'll indulge me a little learning exercise, I'll see if I can't sort out the math on your suggestion just to see where it takes me.

 

Let's say i have $8,000 in capital to invest in SHLD.  I can buy 174 shares at $46

 

or

 

Keep $8,000 in cash, sell 2 of the jan 2013 $45 puts for $2,870, and buy 2 of the jan 2013 $45 calls for $1,790.  This leaves me with $9,080 in cash and my two sets of options.

*************

 

If SHLD goes to $40 by expiration  I lose $1,043 on the common (-13%)

 

or

 

my puts get exercised at $45 costing me $9,000 and my calls expire worthless, netting me $80 in cash and $8,000 in new SHLD common, or total assets of $8,080, a gain of $80 (+1%)

*************

 

If SHLD goes to $70 by expiration I gain $4,174 on the common (+52.2%)

 

or

 

my puts never get exercised and my calls are now worth something like $5,000 ($25 x 200).  With my cash of $9,080 I have total assets of $14,080, a gain of $6,080 (+76%)

 

Is that the general gist of the math?  It ignores commissions and assumes you can execute at the prevailing quotes, but I think that is it.

 

Is there some shortcut way to identify when the options trade looks to be clearly better than using the common, or is it just a matter of doing simple scenario math like this each time you consider a trade?

 

Thanks in advance if you are kind enough to assist in my education.

 

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Eric,

 

http://www.interactivebrokers.com/en/p.php?f=shortableStocks&p=stockYield-default

 

Haven't check the rate, and not able to right now.  You have to not carry a margin balance, and you simply have to turn on the feature through account management.

 

IB is simply bar none the best broker... no other brokers can even approach this level of capability at the retail level.

 

Ben - long and strong on IBKR... I don't lend any SHLD but own a lot of debt of Sears.

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Is there some shortcut way to identify when the options trade looks to be clearly better than using the common,

 

Yes Zarley, you simply look at whatever stocks have the highest short rebate (aka "borrow").

 

Institutional traders can access the rebate / interest on lending thus it is implicity in the options pricing (usually), but most retail can't... so the "math" for retail strongly favors the options trade in these situations.

 

As pointed out above, IBKR has now flattened this asymmetry in the market.

 

Ben

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My options strategy gives you 1.59x leverage without increasing your downside.  Reinvest all of the proceeds from writing the put into purchase of the call.

 

Same downside.

 

1.59x upside.

 

I will admit to not considering options strategies because I am simply out of my depth there.  I've spent little time thinking about these things because they seem overly complicated and I fear the unknown.  But, if you'll indulge me a little learning exercise, I'll see if I can't sort out the math on your suggestion just to see where it takes me.

 

Let's say i have $8,000 in capital to invest in SHLD.  I can buy 174 shares at $46

 

or

 

Keep $8,000 in cash, sell 2 of the jan 2013 $45 puts for $2,870, and buy 2 of the jan 2013 $45 calls for $1,790.  This leaves me with $9,080 in cash and my two sets of options.

*************

 

If SHLD goes to $40 by expiration  I lose $1,043 on the common (-13%)

 

or

 

my puts get exercised at $45 costing me $9,000 and my calls expire worthless, netting me $80 in cash and $8,000 in new SHLD common, or total assets of $8,080, a gain of $80 (+1%)

*************

 

If SHLD goes to $70 by expiration I gain $4,174 on the common (+52.2%)

 

or

 

my puts never get exercised and my calls are now worth something like $5,000 ($25 x 200).  With my cash of $9,080 I have total assets of $14,080, a gain of $6,080 (+76%)

 

Is that the general gist of the math?  It ignores commissions and assumes you can execute at the prevailing quotes, but I think that is it.

 

Is there some shortcut way to identify when the options trade looks to be clearly better than using the common, or is it just a matter of doing simple scenario math like this each time you consider a trade?

 

Thanks in advance if you are kind enough to assist in my education.

 

Your example is not what Eric talked about.

 

Scenario 1: You buy 100 Shares of SHLD at 48$

 

Invested Amount: 4800$

Loss if stock goes to 28$: 2000$

Gain if stock goes to 68$: 2000$

 

Scenario 2: You sell 1 put contract and buy 1.58 call, both with 45$ strike

Invested Amount: 1420$ (call purchase) - 1420$ (put selling)= 0$

Loss if stock goes to 28$: (45-28)*100= 1700$

Gain if stock goes to 68$: (68-45)*158= 3634$

 

I believe it's called a synthetic long position.

 

BTW, anybody knows why it's always SHLD that seems to have these weird options pricing. I remember WatsaIsRadiant posting something similar in 2009.

 

BeerBaron

 

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So far I've written some SHLD puts and used the proceeds to purchase puts on my BAC position.

 

So I have a large BAC position, to me it's easy to figure out how it goes up 4x from here in 4 years.  To others it's easy to see SHLD at 4x in 4 years.

 

SHLD puts cost more than BAC puts.  So I like the dynamic there.  Especially since there is risk of BAC being a zero overnight according to the contagion theories on global financial collapse, but no such risk overnight for SHLD.

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The $45 strike 2013 put has a bid of $14.20.  The $45 strike call has an ask of $8.95.

 

Meanwhile the stock is $46.

 

Why are you guys buying the shares?

 

On my bought shares I participate in Interactive Brokers' "Stock yield enhancement" program which gives me some money for lending my shares out. I'm not sure if it's enough to offset the advantage of doing a synthetic long, but it's something.  Also I'm not sure if anyone saw this analysis, but would appreciate comments.  They supposedly take the real estate and assets into account, and still come up with $6/share target.  According to them it's the deteriorating cash flow plus the pension liabilities.

 

http://notablecalls.blogspot.com/2011/12/sears-holdings-nyseshld-worth-6.html

 

Sorry if that's been posted already, I haven't worked my way through all the SHLD threads just yet :-)

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BTW, anybody knows why it's always SHLD that seems to have these weird options pricing.

 

It's because of stock/option equivalence.  A synthetic short, which is short calls and long puts, is equivalent to a short position.  So, if there's a bunch of people who want to short but can't find shares, you get the price to borrow the shares increasing.  Then, of course, it would make sense to do a synthetic short instead, to avoiding the expense of borrowing.  So everyone would do that instead.

 

So, that pumps up the price of puts and decreases the price of calls.  (How much?  Well, I'd guess that it would get skewed to such an extent that you'd get the same profit from lending out your long shares as you would doing a synthetic long.)

 

For what it's worth, this also happened with Fairfax back in the day.  When the stock was at $150 or so, you could make $10 by converting from long stock to a synthetic long.  Worked out pretty well.  :)

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They supposedly take the real estate and assets into account, and still come up with $6/share target. 

 

http://notablecalls.blogspot.com/2011/12/sears-holdings-nyseshld-worth-6.html

 

Where do they take liquidation value of the real estate into account?  They just seem to be capitalizing the EBITDA number and then subtracting liabilities from it.

 

And after doing so they are saying it's worth $591m ($6 per share):

1x their FY11 EBITDA estimate

3x their "net adjusted" EBITDA.

 

Quoting:

 

Our midrange enterprise valuation is approximately $6.514bn, which is 11x our FY11 EBITDA estimate of $590.7, 32x our FY11 net adjusted EBITDA estimate of $203.7mn. After deducting $3.474bn of secured debt, $765.9mn of unsecured debt and the pension/post-retirement liability of $1.68bn, we estimate value to the equity of just $591.8mn, or $6 a share, down 91% from the current share price of $60.49.

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Seems like a majority of K-Marts I've seen around the country are in crappy locations and are poorly maintained run-down buildings. I don't think it would be as easy to sell a lot of these locations as some people think. Real Estate is only worth what people will pay for it. I do think that K-Mart is an awful business that should be shut down and liquidated though.

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Seems like a majority of K-Marts I've seen around the country are in crappy locations and are poorly maintained run-down buildings. I don't think it would be as easy to sell a lot of these locations as some people think. Real Estate is only worth what people will pay for it. I do think that K-Mart is an awful business that should be shut down and liquidated though.

 

A few Kmart's that I know of are in shopping centers that are half empty so in factoring in the real estate value I'd maybe chop off 30% or so for bad locations and the length of time to sell. 

 

I was actually in a Kmart this past weekend, it's one of the only places you can buy ginormous clothes (3x and up for a relative) and the store is quite sad.  A lot of inventory that looks like it hasn't moved in years, the place just has this mishmash feel.  One minute you're next to washing machines, then suddenly you're in the middle of a toy section, and a few steps later you're looking at $1000 TVs which are next to piles of cheap Christmas candy.

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