On March 21, 2017, Sears Holdings issued the following statement in their 2016 annual report:
“Our historical operating results indicate substantial doubt exists related to the Company's ability to continue as a going concern (page 48).”
If you were to invest in a company, would you consciously put your money into a stock that executives have to say something like this? Naturally, a company needs to cover their tracks with commentary that dampens over enthusiasm for stock investors. To contrast our bias against SHLD, we looked at the 2016 annual report for Target (TGT). Nowhere is there any indication of a “going concern” risk expressed by management. Maybe TGT is in denial or maybe Sears Holdings management is onto something.
Guess what happens when a company is honest about the risks to their viability? Well, in the short term, the stock jumped over +52% from March 21, 2017 to April 19, 2017. Even better was the increase of +101% after our February 10, 2017 article titled “Sears CEO: ‘We’re Cutting Costs, Ignore Conflict of Interest’” to the April 19, 2017 peak. The more speculative traders out there probably didn’t believe the CEO but saw the short squeeze opportunity that was available and profited handsomely.
However, time is the arbiter of truth, and not even one year later we see that Sears Holdings (SHLD) is finding its footing at a price that is more reflective of a company that has “substantial doubts” about their “ability to continue as a going concern.” As of January 26, 2018, SHLD has declined –63.50%.
The good news for Sears executives is that while they engage in practices that appear to be questionable, they have sufficiently absolved themselves of the inevitable lawsuits that will likely follow their eventual bankruptcy.
So what do we expect from SHLD management in the short-term? We believe that the stock will experience another short squeeze with news that is supposed to reflect that the company has “turned the corner.” The temporary boost will rout the short-sellers and buy some time for management. However, as we said in our February 10, 2017 posting, “…anyone who continues to hold their position in Sears will not be rewarded for the value that has been lost since Lampert came on board.”