Tags: michael | carr | lampert

Bargain Shopping with Retail Whiz Eddie Lampert

By Michael Carr   |   Wednesday, 23 Jul 2008 12:03 PM

Edward Lampert has been delivering annual returns averaging more than 30 percent a year to investors for two decades.

And he has been richly rewarded for his success. In 2004, Lampert became the first Wall Street financial manager whose income exceeded $1 billion in a single year. Now ranked by Forbes magazine as the 307th richest person in the world, he is probably best known for merging retail giants Kmart and Sears.

Lampert seems to be a specialist in the retail sector. Among his most recent investments, Lampert bought a large stake in AutoNation. The company operates nearly 600 automobile dealers. Fellow value investor Warren Buffett also likes this business. Buffett owns nearly 10 percent of competitor CarMax.

Using the AutoNation investment as a starting point, this week’s screen was developed to find potential winners among retailers. The criteria are:

• Price-to-sales ratio of less than one, demonstrating that the company is selling at a bargain price.

• The price-to-earnings ratio divided by the estimated earnings growth rate should also be less than one. Many value investors consider a stock to be fairly valued when it sells at a P/E ratio equal to its earnings growth rate. By requiring the stock to sell at less than this measure, we can identify stocks with potential.

• Current ratio — indication of a company's ability to meet short-term debt obligations — of greater than 1.0, which means that the company should be able to raise cash quickly. As an active manager of the companies he invests in, Lampert may need ready access to cash if he decides to make changes. Having this cash available from the company itself eliminates financing costs.

• Tangible assets, like real estate and inventory, should make up the majority of the company’s book value.

We restricted the screen to large-cap stocks and identified six retailers that might end up on Lampert’s shopping list:

AutoNation (AN) Lampert owns more than 37 percent of this company. The recent price near $8 is about 50 percent lower than when he purchased parts of this position. Lampert was adding to his stake as recently as June with prices above 15. Given his long-term focus, this is a rare opportunity for individuals to earn more than the hedge fund investor if AN moves higher.

Best Buy (BBY) With historical sales growth of 20 percent projected to slow to only 15 percent, the market may have overreacted and driven BBY’s stock price too low. Recently the stock sold for about $39 a share, offering investors a 1.5 percent yield and trading at only 11 times projected earnings.

Dick’s Sporting Goods (DKS), a large sporting goods retailer, has the fastest historic growth rate in the industry. DKS is a bet that consumer discretionary income, like spending on items such as golf clubs and fishing poles, will increase as the economy recovers. Recent price: $16.55.

OfficeMax (OMX) has almost $9 billion in annual sales. Trading near $12.62, this stock fits the model Lampert followed with Kmart. Real estate alone (about 70 distribution centers and almost 1,000 stores) may make this a valuable takeover target at cost of less than five times earnings.

Penske Automotive Group (PAG) operates 170 auto dealers in the United States and 145 in the United Kingdom. This company has valuation levels very close to AutoNation. Recently trading near $12.50.

Tractor Supply Company (TSCO) operates almost 800 retail farm and ranch stores in rural communities under the Tractor Supply Company and Del's Farm Supply names. Nearly 3 percent of the stock is owned by the Bill and Melinda Gates Foundation. Analysts are looking for a 25 percent gain from the recent price level near $30.

© 2017 Newsmax. All rights reserved.

1Like our page
2Share
MichaelCarr
Edward Lampert has been delivering annual returns averaging more than 30 percent a year to investors for two decades. And he has been richly rewarded for his success. In 2004, Lampert became the first Wall Street financial manager whose income exceeded $1 billion in a...
michael,carr,lampert
612
2008-03-23
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved