Sears and Kmart merger is not a great match
Tom Dougherty in the Chicago Sun-Times, discussing Kmart and Sears
FROM THE CHICAGO SUN TIMES
A peek at Wall Street’s ‘don’t touch this’ list
BY DAVID ROEDER SUN-TIMES COLUMNIST
Just like our mothers used to tell us, the important thing about life sometimes isn’t what we do, but what we don’t do. To apply that to investing, I’ve been nosing around for what’s on Wall Street’s “don’t buy” list, the stocks that are dogs by common agreement, or by a consensus in the making. The latter category is important because one must rely on analyst recommendations.
There are many smart analysts. But they have a group-think mentality that keeps positive ratings on faltering stocks. One stock that has clouds of negativity gathering around it is Netflix (NFLX) , now at $11.25 after trading around $35 in July. William Lennan of W.R. Hambrecht & Co. crystallized the thinking about the DVD rental firm last week by calling its business plan “fatally flawed.”
Netflix vacillates from cutting prices to spur volume to raising them to cull unprofitable accounts. Most analysts who had buy ratings on the stock have lowered them to neutral or sell. Another example is Amazon.com (AMZN) , which Friday lost nearly 2 percent of its value to close at $38.55. It also has had a bad year, with the latest blow being Bank of America initiating coverage with a sell rating.
Some analysts remain positive about Amazon, but most are starting to see that this is a slim-margin retailer, not a growth stock. So far, the analyst downgrades have been relatively few for Applebee’s International (APPB). Trust me, they’re coming. Applebee’s runs restaurants for suburbanites who can’t think of a better option for a night out. I made fun of them when they blamed reduced patronage on the Olympics. But now the company has cut its earnings outlook for the fourth quarter. It blamed the World Series.
What’s next on the excuse list, home-cooked dinners for the holidays? Closer to home, keep an eye on Chicago-based Equity Residential (EQR), a Sam Zell company. It’s gotten several downgrades this year as it has sold properties to cover its dividend. Analyst Rob Van Bergen of Zacks Investment Research, which sends ratings to big investment banks, lists EQR as a hold but said he may cut the rating soon if the pattern doesn’t improve.
Among other stocks for which Wall Street sends a sell message are Chicago¬based Bally Total Fitness (BFT), which carries the taint of an accounting probe; EDGAR Online (EDGR); Imperial Oil (IMO), owner of the Esso brand; pricey clothing manufacturer Oshkosh B ‘Gosh (GOSHA), and Winn-Dixie Stores (WIN). RETAIL WRECK: The wire stories circulated on the Internet last week mostly stopped at saying the Sears-Kmart deal promises shareholders of Sears, Roebuck and Co. (S) their choice of stock or $50 a share.
That’s true, but only to a point. Kmart boss Edward Lampert fixed the total reimbursement package at 55 percent shares and 45 percent cash, while saying he’s taking his compensation for his Sears stake in shares. Sears investors who want an all-cash payout will get it only if there are enough requests for shares to equal a 55-45 split.
If everybody wanted out, some exits would be locked. If you’re a Sears diehard (pardon the expression) who has owned shares since Robert Wood ran the place, sell the heirloom now. Lampert offered $50, maybe. The market closed Friday at $52.95. Take the market.
The new Sears Holdings Corp. is a keeper only if you believe there’s value in the real estate ¬- and that’s not a short-term proposition. Ask yourself how many of the good locations Wal-Mart Stores (WMT) , Target (TGT) and Kohl’s (KSS) have left behind. ON THEIR OWN: Robert Huffman and Maury Fertig, two former managing directors for Citigroup in the Midwest, have opened a Northbrook-based investment advisory firm for wealthy clients.
Relative Value Partners will specialize in exchange-traded and closed¬end funds. Fertig said clients have learned their lesson from the bear market and no longer have lofty growth expectations. Nowadays, they’re happy if you can build them a portfolio liable to return 8 percent a year over time, he said. Exchange¬traded funds the firm is recommending include the iShares Russell 2000
Growth Index Fund (IWO) , which Fertig believes is due to outperform the Standard & Poor’s 500 and value indexes. Other recommendations include the American Stock Exchange-listed SPDR funds for energy (XLE) and health care (XLV) and Pharmaceutical HOLDRS Trust (PPH). The firm’s Web site is www.relativevaluepartners.com.
CLOSING QUOTE: On Sears and Kmart, “Talk centers on physical store locations and the consolidation and fat-trimming the new management team plans to whole-heartedly pursue. But there has been nothing said about the real problem, and that problem is brand — and the fact is the Sears and Kmart brands are non-existent to the consumer.” — branding expert Tom Dougherty, Stealing Share.