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October 16, 2006

Insider Buying at Sears Holdings

On Friday, theflyonthewall.com, citing a report in Barron’s Online, noted that there was some meaningful insider buying at Sears Holding (SHLD) recently:

A director at Sears Holding (SHLD) recently bought $5.5M worth of the company's stock just as it was climbing to an all-time high. Richard C. Perry, the co-founder and president of Perry Capital, bought a total of 33,000 shares for his New York-based hedge fund on Oct. 9 and 10. The purchases, which were made for prices ranging from $165.02 to $168.95 a share, came as the stock was soaring to an all-time high of $171.96 on Thursday. The run-up began after Sears Holdings reported Q2 earnings on August 18 that handily beat the consensus estimate. Since then, reports have speculated that Edward Lampert, a superstar hedge-fund manager who doubles as chairman of Sears, may be targeting Anheuser-Busch (BUD), Gap Inc. (GPS) or Home Depot (HD) for a buyout. Perry Capital's transactions in Sears Holdings shares have accurately predicted the stock's movement in the past, says Ben Silverman, director of research at InsiderScore.com. According to SEC filings, Perry Capital sold about 857,400 of the company's shares in Q2 2005, bringing its total holdings down to 2M shares by June 30. During that period, the share price rose to a high of about $155. In 2H 2005, however, the stock price tumbled and was range-bound between about $115 and $125. Perry Capital took advantage of the lower prices to purchase 683,200 shares during Q3. With this week's purchase, Perry Capital now holds about 2.7M shares of Sears Holdings, or 1.7% of total outstanding shares.

You got to love that revisionist history about the run-up in SHLD that began after 2Q earnings “handily beat the consensus estimate....."

In reality, SHLD sold off hard following the earnings, which supposedly missed the consensus. The fact that the consensus was formed by a very few analysts that had a very wide range of estimates with no input from management didn’t really matter when the stock went from $160 to the low $140s. Further pressuring the shares at that time was new language in the press release that indicated that share buybacks might cease in favor of new acquisitions determined solely by Lampert.

I have stuck with the shares using Credit Suisse analyst Gary Balter’s long running target of $180. We are getting close to that level now so I will have to decide whether to hold to my discipline. One other aspect to my holding in SHLD is that I am turning over a portion of my clients to Eddie Lampert’s care. There are plenty of great money managers out there, including Lampert, and my pride won’t let me get in the way of letting someone else help me out. If I decide to hold Northlake's position in SHLD, gaining access to Lampert’s expertise will be one of the major reasons.

Posted by Steve Birenberg at October 16, 2006 07:37 AM in SHLD