Dear Mr. Berko: Sears finally reported a profit last May — $2.28 a share. My stockbroker had me buy 1,000 shares in early June at $7 because he thought Sears had turned the corner to profitability. He insists Sears will trade in the low $10s this year and wants me to buy 1,000 more shares. What do you think? And what do you think of Coca-Cola’s new diet soft drink? My broker also wants me to buy 200 shares of Coke. Please advise me. — GH, Vancouver, Wash.
Dear GH: Your broker has GAPO (gorilla armpit odor) and an IQ low enough to freeze water. Sears is still your grandfather’s store and can’t change. And CEO Eddie Lampert wants to empty every Sears store as fast as he can so his Seritage Growth Properties (SRG-$45) can make a sizzling fortune from Sears’ misfortune.
Sears Holdings (SHLD-$6.97), in the traditional sense, didn’t earn a pfennig that quarter. The stock rallied temporarily as some investors, high on hope and low on brains (a condition caused by eating too many tofu burgers), bought the shares; they soon got butt-kicked by reality. Yeah, SHLD, for the first time in several years, reported a quasi-profit that quarter, but that profit wasn’t operating income. Rather, it derived from the sale of Craftsman to Stanley Black & Decker for $900 million. Those proceeds are called non-recurring income. So if we black those numbers out, SHLD had a loss of $230 million that quarter. SHLD is smoking cash at a rate of $150 million a month, and Fast Eddie’s hedge fund, ESL Investments, has $1.6 billion in loans to SHLD, at an average interest rate of 9.75 percent.
Fast Eddie’s Seritage Growth Properties should benefit hugely from Sears’ problems — all the more if he bankrupts Sears. Sears Holdings occupies many hectares of prime real estate. And SRG has the right to capture all of the space occupied by Sears, including by Kmart stores. The average Sears store is about 140,000 square feet, while the average Kmart is 94,000 square feet. Sears, as an original anchor tenant, pays an average of $3 per square foot, while smaller mall tenants pay between $12 and $16 per square foot. So Fast Eddie’s Seritage Growth Properties is renting Sears’ vacated space (after rehab) to Lucky’s Market, Whole Foods Market, Dick’s Sporting Goods, Scheels, medical practices, for-profit colleges, PetSmart, Nordstrom Rack, Saks Off 5th, new car showrooms, Dave & Buster’s, tattoo parlors, pawnshops and pot shops. New tenants are paying SRG an average of $18 per square foot, and Fast Eddie’s real estate investment trust is making a bundle.
Because Sears lacks a positive future, I urge you to do two things right now: Sell the stock, and then fire that peccant sad sack you call a broker, who must have slipped into the gene pool when the lifeguards weren’t watching.
Five years ago, Coca-Cola (KO-$45.78) was trading at $41. Since then, revenues, earnings, book value, cash flow, return on capital and capital spending have declined, and total debt has almost doubled. Meanwhile, revenues, book value and earnings are expected to decline again this year. KO’s 3.4 percent dividend has increased in each of the past 55 years and could be increased next year, but it’s not enough to override KO’s continued sloppy performance. I’m surprised that Warren Buffett is still its largest (400,000 shares) shareholder. Because the stock has traded flat as a flapjack for the past five years, I’d not be surprised if Buffett — even if he does seem to have a soda straw view of KO’s future — lost his patience and let his KO shares go.
Its new diet soft drink, Coca-Cola Zero Sugar, is selling well in Europe and is ballyhooed as a potentially strong contributor to KO’s soft earnings. But KO seems to have more diet soft drinks than Miss Piggy has Muppets. And I really doubt a new diet drink can give KO the fizz needed to move its share price above a flat line. I wouldn’t care to own the stock, which has floundered in the portfolios of Vanguard, BlackRock, State Street, Berkshire Hathaway and other prominent institutions for years.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]