Hedge Fund Managers Flail in Retail

NEW YORK (TheStreet) -- If you asked hedge funds billionaires Marc Lasry, Eddie Lampert, Bruce Berkowitz and Bill Ackman off the record whether they might have done better having never invested in retail companies such as J.C. Penney (JCP) and Sears Holding (SHLD), their positions might make more sense. What leads them to buy what they do is a closely held secret, but it certainly appears as if each misread three critical areas in going long in the retail sector.

The value of the assets of these companies has been grossly overstated.

In an interview with Fortune in November 2012, Bruce Berkowitz, head of the Fairholme Fund, claimed that Sears "would be over $160 a share if the land on the books was fully valued." At that time, Sears was around $60 a share. Now it is around $38.50 a share.

About one billion square feet of vacant retail space exists in the United States, according to Urban Land magazine. That is expected to decline by 50 million square feet by 2015. Sears' website has 120 closed stores for sale. Sears and J.C. Penney are two of the biggest occupants of strip shopping malls, for which there is a tremendous glut of vacant space.

That high vacancy rate should be expected. Over the past 20 years, the pace of building retail space was five times greater than sales. It is easy to see how overbuilding like that leads to one billion square feet of vacant retail space. What is difficult to comprehend is how that leads anyone to conclude that the land of Sears, in one of the least desirable segments of the real estate market, is undervalued by a factor of more than four.

Essentially, investors underestimated the impact of the Internet on retail sales.

As detailed recently, Amazon (AMZN) reported a record quarter for the crucial holiday shopping season. Brick-and mortar retailers took it on the chin, and for the first time more than half of retail sales were via mobile devices. This furthers the strong sales growth of Amazon, at 32.70% for the past five years. Over that same period, sales growth has fallen for Bon-Ton Stores by 3%, by 4.70% for Sears, and by 8.10% for J.C. Penney.


The competition in the retail sector was also grossly underestimated.

Most egregious was Eddie Lampert, with absolutely no retail experience, appointing himself as head of Sears. In that capacity, he was selected "Worst CEO of the Year" in 2007. If nothing else, Lampert's performance at Sears has been consistent, as Sydney Finklestein of Dartmouth's Tuck School of Business selected both him and Ron Johnson, the former CEO of J.C. Penney, as two of the worst CEOs for 2013.

Bill Ackman, founder of Pershing Square Capital Management, sold out of J.C. Penney in August 2013 at a loss of about $473 million.

Ackman realized how badly he miscalculated. It would seem that the other shareholders of Sears, J.C. Penney and Bon-Ton Stores would realize just what was overestimated and just what was underestimated and follow Ackman in selling.

At the time of publication, the author held no positions in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

Jonathan Yates has written for numerous publications including Newsweek and The Washington Post. He is a former general counsel for a publicly traded corporation. Much of his career was spent working on Capitol Hill for Members of Congress in both the House and Senate. He has degrees from Harvard University, Georgetown University Law Center and The Johns Hopkins University.

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