Institutional Investor's Alpha Magazine - October 2007 - (Page 5)

Longs TheLampert Touch & Shorts I s Eddie Lampert losing his touch? In April, shares of the once-gilded retailer Sears Holdings Corp. were trading at an all-time high of $195, and it seemed like Lampert, whose ESL Investments owns 46 percent of the company, could do no wrong. Then the Lampert mystique started to fade. Despite an aggressive $3 billion share repurchase program, Sears’ stock price is down 25 percent since May; second-quarter operating income plummeted 34 percent at Sears and Kmart stores from the year-earlier period; and, to add insult to injury, ForestEthics, a San Francisco environmental group, is launching an ad campaign against Sears for its failure to use recycled materials in its catalogs. (Sears mails 425 million catalogs annually.) To make matters worse, a handful of hedge funds, including New York–based firms Alson Capital Partners, Atticus Capital, Raiff Partners and Third Point Partners, unceremoniously dumped their holdings. All this adds up to a minicrisis for hedge fund billionaire Lampert, whose Greenwich, Connecticut–based ﬁrm had roughly two thirds of its $16.5 billion portfolio tied up in Sears at the end of June. Lampert’s three other sizable positions — AutoNation, AutoZone and Citigroup — were down 8 to 18 percent during the same period. Neither Lampert nor hedge funds like Perry Partners that have long backed his efforts to bring Sears back from the brink are commenting on the matter. Others, however, have voiced their conﬁdence in Lampert’s ability to inject more magic into the struggling retail giant the way only hedge funds can — by buying shares. Activist investor William Ackman of New York–based Pershing Square Capital Management recently purchased 5 million shares of Sears, and Third Point repurchased 1 million shares, according to sources. One fund manager in the midst of unloading his Sears position says he still loves the company but has already realized his 70 percent anticipated return. He says he would advise pension funds to put the stock away for the long term. Another manager who has held on to the stock believes Sears is worth $300 a share — either through Lampert’s turnaround effort or a sell-off of its assets. He points to not just Sears’ abundance of undervalued real estate but the value of its brands: Kenmore, Craftsman, DieHard, Lands’ End and Sears Canada. Lampert, who has helped Sears generate higher cash flow margins since taking over as chairman in 2005, has also convinced backers that the steady erosion of Sears’ same-store sales is little cause for worry. “Individual retailers are opening, closing and remodeling stores all the time,” Lampert wrote in a letter to shareholders on March 15, 2006. “In this context, the simple comparison of a single store breaks down.” Some of the smart money, it seems, still believes him. — Stephen Taub ESL Investments’ Edward Lampert: Trying to work his magic at Sears. Mortgage Master F or nearly nine months, Donald Brownstein, founder and CEO of $650 million Stamford, Connecticut– based hedge fund ﬁrm Structured Portfolio Management, has been generating triple-digit returns through SPM Strategies Portfolio I — a $50 million fund set up to short the subprime mortgage market. Last month, hoping to OCTOBER 2007 • INSTITUTIONAL INVESTOR’S ALPHA • 5 Illustration by Joshua Gorchov for Alpha

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - October 2007

Institutional Investor's Alpha Magazine - October 2007 Contents Letter from the Editor Longs & Shorts Pension Corner: Applied Knowledge The Good Guys: Autism Advocate Interview: Nerves of Steel Cover Story: Ivy League Education Alpha Awards: Top Service Providers: Trying Times Strategies: Passage to India Profile: The Oracle of Irvine Alpha Bytes: Futurama Research Center: Funds of Funds 50 Unhedged: Commentary: Crisis? What Crisis?

Institutional Investor's Alpha Magazine - October 2007

For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.