Could Sears Holdings Corp. be a baby Berkshire Hathaway in the making?

Last semester my history professor and I used to stay after class and discuss the market. One discussion between my professor and I prompted her to ask me what stocks do I like right now? I mentioned Sears, and needless to say her reaction was not one that I had hoped for. It struck me right away that she was not up to date with what was going on at Sears Holdings Corporation (NASDAQ: SHLD). My professor had the picture of a struggling American icon. I had the vision of a baby Berkshire Hathaway.

Sears Holdings was created when Kmart Holding Corp acquired Sears Roebuck, thus creating Sears Holdings Corp. Both Kmart and Sears have been around since the late 19th century (Note that Sears, Roebuck and Co. was officially formed in 1893) and struggled in the latter half of the 20th century as Wal-Mart (WMT) expanded.

A quick briefing on the modern day Sears Holdings Corporation taken from Yahoo Finance:

The company operates through three segments: Kmart, Sears Domestic, and Sears Canada.
The Kmart segment operates stores that offer general merchandise, including products sold under labels, such as Jaclyn Smith, Joe Boxer, and Martha Stewart Everyday, as well as in-store pharmacies.
The Sears Domestic segment operates full-line stores that offer an array of products, including home appliances, consumer electronics, tools, fitness, and lawn and garden equipment; automotive services and products, such as tires and batteries; and home fashion products, as well as apparel, footwear, health, beauty, pantry, household products, and toys. This segment also operates specialty stores, which provide casual clothing, accessories, and footwear for men, women, and children, as well as home products and soft luggage.
In addition, this segment provides product repair services for home appliances, lawn and garden equipment, consumer electronics, floorcare products, and heating and cooling systems. This segment also offers its products through apparel Web sites, catalog mailings, international businesses, and end retail stores. The Sears Canada segment operates retail stores, which offer apparel and other softlines. The company also offers its products through its Web sites. As of May 18, 2006, the company operated 3,900 full-line and specialty retail stores in the United States and Canada. Sears Holdings was founded in 1899 is headquartered in Hoffman Estates, Illinois.

To see why this Stockmaster think's Sears Holdings will become the next Berkshire Hathaway let's look at the man running the show, Edward Lampert.

Edward Lampert graduated from Yale University in 1984 with a B.A in Economics. At Yale he was a member of the Skulls and Bones society and served as an interim at Goldman Sachs (GS). At age 25, he started his own hedge fund, ESL Investments. Using a investment style similar to Warren Buffett, ESL Investments has averaged returns of 29% a year and made Lampert the highest paid hedge fund manager in 2004. Edward now wears the crown as the richest person in Connecticut with a net worth of $3.8B . ESL Investments became Kmart’s major shareholder when the company was going through bankruptcy and the shares were depressed. When ESL became Kmart's largest shareholder, Edward Lampert then became chairman of Kmart. Lampert also receives credit for being the architect of the Kmart-Sears merger and has been compared to Warren Buffett by legendary investor Marty Whitman of Third Avenue Management. Lampert has a long way to go before he can be considered on the path to become the next Warren Buffett, but if he can continue with classic turnarounds and making huge return on investments, he's well on his way.

Let’s face it, Sears the retail operation is a mess. Same store sales continue to drop each quarter but slowly improving due to restructuring. In it’s latest 10-Q ,management continues to reduce expenses, increase margins, cut inventory, and continues to introduce Kmart brands (Martha Stewart Living) to Sears and vice versa. The point I’m trying to drive is the investments Edward Lampert is making. Investment income accounted for $101M of the company’s $327M net income. This number continues to increase each quarter thanks to Sears Holdings producing cash flow due to sales of intellectual property and tax breaks.

SHLD shares have been trading between $160 to $175 for the last three months which in my mind is a buying opportunity for those interested. This is a perfect long term stock as long as Edward Lampert continues to invest cash flow and improves the operation of the core business. I won't put a price tag on this puppy but let's think big like Berkshire Hathaway (BRK.A) and say in the next 30 years SHLD should trade at say..$110,000 a share.

Article written by: Alex Garcia
Article posted on: January 11th, 2006

The author, Alex Garcia is a Contributor for the Stockmasters and runs WS Lounge - Wall Street ramblings and more by your average man. Visit WS Lounge for Alex's market advice and commentary.

Disclaimer: Alex Garcia does not own any SHLD or BRK.A shares, nor does he own any long or short positions in the stocks mentioned.