Sears Holdings merits a 'hold' for forecast gains

I would like your opinion of my shares of Sears Holdings Corp. I'm not sure about its future.

- C.L., via the Internet


The famed retailer, with about 3,900 full-line and specialty stores in the United States and Canada, has a shopping list of concerns that include the economy.

High energy costs, a weak housing market, the need to upgrade stores and strong competition from narrowly focused retailers have all contributed to sales declines last year and this year.


Meanwhile, it has made some improvement in profit margins and inventory in portions of its business. It remains focused on streamlining corporate functions and improving efficiency.

This company that resulted from the 2005 merger of Sears and Kmart has two familiar retailing names and sells the well-known Kenmore, Craftsman, DieHard and Lands' End products.

To jog the public's memory, it has launched the marketing slogan "Sears: Where It Begins" and a talking Kmart light bulb called "Mr. Bluelight."

Shares of Sears (SHLD) are up 4 percent this year after a gain of 45 percent last year. Profit rose 20 percent in its fiscal first quarter due in large part to a legal settlement.

Brand names aside, this is not your father's Sears: Its chairman is billionaire hedge-fund manager Edward S. Lampert, who owns more than 40 percent of the company.

Lampert might use its cash holdings of more than $3 billion to try to turn the two chains around and aggressively acquire other businesses. Or he could be biding his time, investing the retailer's impressive cash flow until he one day captures the true value by selling off valuable real estate holdings and proprietary brands.

Whatever course Lampert may choose, he does have a deserved reputation for greatly enhancing shareholder value.

The consensus rating of Sears stock is "hold," according to Thomson Financial, consisting of three "buys," three "holds" and one "underperform." Fitch Ratings recently affirmed the retailer's senior notes at "BB," citing its strong market presence and balance sheet, but noting that longer-term sales and earnings face pressure from growing competition.


The company's use of derivatives in its investments, which gave income a substantial boost last year, has not played a major role in 2007 results, Lampert said.

Earnings for the 2008 fiscal year ending in January and the 2009 fiscal year are both expected to increase 14 percent. The five-year annualized growth is projected to be 10 percent versus a 14 percent estimate for its peers.

Is there a good reason to put money in Weitz Hickory Fund?

- M.R., via the Internet

This fund feels absolutely no peer pressure.

With a concentrated portfolio of 36 holdings, it avoids the herd as it buys out-of-favor stocks in a variety of sizes when it considers them too cheap to pass up.


That can mean a bumpy ride from time to time. Its holdings in a number of stocks tied to the housing and mortgage markets, considered pure poison by most fund managers these days, are examples of this.

The $400 million Weitz Hickory Fund (WEHIX) is up 24 percent during the past 12 months to rank above the midpoint of midcap growth and value funds. Its three-year annualized return of 14 percent puts it in the lower half of its peers.

"Weitz Hickory Fund is not cheap, and it is small, but we strongly recommend it because it gives access to the best ideas of portfolio manager Wally Weitz," said Todd Trubey, an analyst with Morningstar Inc. in Chicago. "Weitz is a disciplined manager perfectly comfortable with underperforming for a period of time if he believes the rewards at the end will be dramatic."

Weitz, the founder of the investment firm that bears his name, built strong long-term records at Weitz Value Fund and Weitz Partners Value Fund. He took over this fund in late 2002 and is always willing to make large individual stock and sector bets that deviate sharply from its peers.

The fact that the portfolio is highly concentrated adds to potential volatility.

Financial services recently represented more than a third of the fund's holdings, with media, consumer services and health care other significant concentrations.


Its top holdings are Wells Fargo Government Fund, Countrywide Financial Corp., Redwood Trust Inc., Berkshire Hathaway Inc., UnitedHealth Group Inc., Tyco International Ltd., Liberty Interactive, Liberty Capital, Liberty Global Inc. and Coinstar Inc.

This "no-load" (no sales charge) fund requires a $5,000 minimum initial investment and has an annual expense ratio of 1.20 percent.

I hear about a stock's yield. How do you compute it, and what exactly does a high yield mean?

- R.M., via the Internet

Yield is a measure of what a company pays out to its shareholders in dividends.

It is calculated by dividing the amount of dividends paid per share over a year by the stock price. For example, a $40 stock paying out $2 in dividends in a year has a 5 percent dividend yield.


"The idea is that if you bought the stock at today's price and current dividend rate, over the next year you'd get that as a percentage return," said James Paulsen, chief investment officer for Wells Capital Management in Minneapolis. Mature businesses that are beyond their growth phase and into their cash flow phase tend to have higher yields to compensate for lack of growth, he said.

Companies in the growth phase use their capital to finance growth and tend not to pay out dividends.

"Utilities, consumer staples, financials and integrated oil stocks tend to have above-average dividends," Paulsen said. "High-growth areas such as technology and health care and also smaller companies won't typically pay as high a dividend."

Two cautionary notes: A high yield can sometimes indicate a high risk of a dividend cut. A yield also can be high because a company's stock price has fallen but its dividend wasn't cut.

Andrew Leckey writes for Tribune Media Services.