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November 21, 2006

Sold Sears Holdings

I decided to step to the sidelines on Sears Holdings (SHLD). I sold all shares held by clients and personally last Thursday and Friday.

I don’t really see anything in the SHLD that has changed much as a result of last week's earnings report. However, I do think the falling gross margin and EBITDA at Kmart provides some useful ammunition to the bears that will linger through the holiday season. Pitching the line that Sears will similarly run out of margin expansion in the next year or two could prove an effective argument....

I really don’t think that matters all much, just as I don’t think the obsession over same store sales really matters much. This story is about Eddie Lampert and his ability to create value. To create value requires astute decision-making on his part and no backtracking in the retail turnaround story. With Sears still on the mend, I expect 2007 to offer similar quarterly results to what we have seen recently and that is good enough on the retail story.

The primary reason behind my decision to sell is that for the first time since I bought the shares in late 2004 (I've added it to new client portfolios regularly since then) I don’t feel like I have an analytical edge. Northlake's investment strategy is primarily ETF based through a sector rotation among small, mid, and large cap indices and growth and value indices. Consequently, I limit individual stock holdings to only those companies where I feel like I have a real edge. This explains my focus on media stocks --- that is my area of expertise and I think I can analyze and trade those stocks better than the average investor.

Additionally, I had a long standing target of $160 for SHLD based on the work of Credit Suisse analyst Gary Balter. Balter subsequently raised his target to $180. At $173, I feel like I am close enough. I could have sold at $180 a few weeks ago but I made what turned out to the incorrect decision to wait out the quarterly report. Put together my loss of an analytical edge and reaching my target and sale seemed like the disciplined play.

SHLD CEO Eddie Lampert is probably a much better investor than I and he has greater resources and access to investment opportunities that I will never be fortunate enough to receive. I like the idea of letting Mr. Lampert invest a portion of my own and my clients money and that is almost enough to make me hold the shares. But in the end, I decided that wasn't a good enough reason if my confidence in my analytical abilities was not 100%.

I can always go back in and buy SLD again. In fact, based on what I know now, I think I would re-enter around $160. That would provide enough upside to my $180 target to compensate for my lower confidence level.

Posted by Steve Birenberg at November 21, 2006 08:04 AM in SHLD